Having a financial plan ( that is a document of what is going to be done by whom and when relative to your finances) is a critical underpinning of your personal financial health. However, without validation, the plan looses a lot of value.

Annual Review

Personally I think a review as least annually is the minimum although some probably like to check how there are doing more often.  Less often provides to great a risk that important adjustments get missed and ultimately result in the plan no longer being achievable.

I do my reviews on a calendar year basis and have 2016’s currently underway – hence this post.

What is it?

Simply put the review should consist of four things:

• Income – How much was it and where did it come from.    This could be on a before or after tax basis (if after tax you don’t need to track taxes as a separate expense item).
• Expense – what did you spend your income on, the use of categories here to group expenses is pretty well mandatory so the document is not unwieldy.  It should have enough detail though to be enable meaningful analysis and decisions.
• Income less Expense –  This is pretty important.  If you are spending more than your income some adjustment is likely needed.
• Investment Income –  I do a more detailed separate breakdown on this income because of the risk and volatility associated with it.   The focus of this review is obviously realized and unrealized capital, interest and dividend incomes (or losses but I try to avoid those.)

For What time frame?

The longer period the data covers the better and this is really key for good retirement planning.  For me the data covers 20 years.

Now the question is, based on this data, are things proceeding as you planned?

That means focusing on questions like;

• Are there unexpected increases in expenses?
• Considering what stage your plan is at is the increase in net income or decrease as expected?
• Is inflation occurring at expected levels (e.g., checking the average cost of property tax over time – assuming the base property is the same gives a sense of what percent it is creeping up – 20 years of data really help with this.)

And so on.  The same type of thought process can be applied to your investment portfolio.

And finally, figure out what you need to change, adjust the plan and you are good until next year.

Note:  Net worth analysis and change over time, future income forecasts, and expense forecasts, market and inflation analysis, security considerations (e.g., insurance) are all advanced attributes but this post is focusing on the basics.