Q2: The Strategic Checkpoint
The second quarter of the year is an important strategic checkpoint in the annual cycle, and it is important to keep an eye on the past as you review the quarterly performance of your financial portfolio against your annual financial goals.
Today, we’ll go over some tips for “spring cleaning” your finances and how to attack Q2 with a plan that works for you! We’ll cover budgeting, debt management, investments, tax optimization, and more.
Conduct a Mid-Year Financial Health Assessment
First, consider evaluating your net worth to record any progress made toward your goals and areas of improvement for Q2.
Assets vs. Liabilities
Start by calculating your assets vs. liabilities. Most people only think of dollars in a bank account when considering assets, but maybe you have stocks, bonds, savings accounts, real estate, or other investments also contributing to your overall financial portfolio. Liabilities typically include debt and other loans, but right now is a great time to also examine any upcoming payments you might need to make, accounting for unexpected expenses, etc.
As Allianz points out here, a “solvency ratio” to aim for is 50% – the point at which you’re considered financially healthy and you own at least half your total asset base outright. As you age, your ratio should go up: it is common for a student or young person to have more debt than assets, but the goal should be to pay that down in your favor as you get older.
Tools to Track Your Net Worth
Evaluating your net worth is a great way to see financial progress year-over-year, and even month-over-month as you take a more granular approach to your goals. There are several helpful tools for net worth tracking, from Empower – which focuses on tracking investments and retirement readiness – and Monarch Money – an all-in-one-tool for balancing tracking with budgeting – to Copilot Money – aimed at those who prefer a “set it and forget it” approach that doesn’t require constant checkups – and Kubera – best for individuals with diverse assets.
Speaking with a First Light advisor today can help you determine which platform or service is best for your individual needs.
Review Cash Flow Statements
Next, review your cash flow statements: calculate your monthly income balanced against known expenses so you can see areas that don’t match up or where you might have wiggle room for unexpected expenses and saving for the unknown. Identifying negative cash flow patterns can help you fix them for the future.
Many online services boast that they will automatically cancel subscriptions and help save you hundreds of dollars a year, but a manual review (done for free at your convenience) can be equally as efficient. Adjust your discretionary spending as necessary to fit your unique budget. Identifying areas where you can cut back on unnecessary spending can help you pay down debt, shore up college and retirement accounts, and sock money away for “rainy day” adventures in the near or far future.
Compare Spending
Finally, compare your spending in Q1 to your annual budget targets. Many folks enter the new year zealous to get their finances in check but find themselves struggling to stay on target after just a few months; in fact, this article suggests that most resolutions die on the vine as early as February!
Oftentimes, this dilemma can come down to not knowing how much you are actually spending. Tracking everything, even on pen and paper, is a surefire way to see if you are meeting your goals. Consider adjusting your quarterly allocations as necessary: perhaps you over- or under-shot your estimates and now need to recalibrate given real life. There’s no shame in switching up your approach! The most important thing is that you stay on the right track and develop a plan, alongside an advisor if necessary, that works for you.
Optimize Your Budget for the Remainder of the Year
Rebuild your budget as necessary according to the “50/30/20” framework that is widely accepted as a good target for hitting your goals: 50% needs, 30% discretionary, and 20% savings and debt repayment. It is easy to see these categories bleed together when you’re not paying attention. By tracking everything in a way that’s easy to see and understand, you can more closely keep spending within your self-imposed guardrails. Check out this Brightbridge guide on creating a spending plan to fit this framework.
As mentioned above, eliminating subscription and recurring expense leakage can do wonders for your finances. Subscription-modeled companies sometimes make up to 90% of their revenue from customers that sign up for a program then forget to cancel it even when they are no longer using it. Don’t let that be you!
Streaming services, Subscription as a Service (SaaS) models, and automatic renewals can wreak havoc on your wallet if you aren’t careful. It’s easy to see a $10 subscription as easily fitting within a budget, but when we forget what we’ve already signed up for and continue subscribing ad nauseam, the total can easily creep up.
Consider adjusting your budget categories for seasonal expenses: summer travel, home maintenance that escalates with warmer weather or dips with the end of the cold season, summer childcare or end of the school year-related expenses, etc. Many folks fail to anticipate seasonal expenses, but you can be the exception to the rule with a critical eye and some smart planning!
Reassess Debt Repayment Strategies
Compare debt snowball to debt avalanche methods, namely how quickly debt is adding up to the point where you are spending far more paying down interest than cutting into principal. Interest over time is an important knowledge point: if you fail to pay down debt for X months, how much does interest on your loan compound and cost you more money in the long-term? Assessing your individual debt sources will help you get a handle on high priority loans, e.g. what needs to be paid first and what can maybe wait a little longer.
Consider evaluating refinancing opportunities. Here is a great example of a time when you may want to involve a First Light advisor to ensure you are getting the best repayment terms. Just because you sign up for one loan doesn’t mean you are locked into it for life: there are consistent refinancing opportunities for mortgage rates, student loan consolidation, and credit cards that specialize in balance transfers with lower interest rates and even percentage forgiveness. Homebuyer has a comprehensive refinancing guide here that you may find helpful as you rebalance your approach.
Calculate your debt to income ratio (DTI); you must establish a baseline before you can get credit approval and increase your borrowing capacity. Knowing how much of your income is going towards debt can also help you balance other expenses in your life, mainly eliminating discretionary spending if necessary.
Refresh Your Emergency Fund and Savings Goals
Q2 is a perfect time to reevaluate your emergency fund target and whether you have enough money set aside for 3-6 months of living expenses, should things go south. No one wants to plan for losing a job or an unexpected medical cost, but it is smart to do so just in case.
Automate your savings contributions via various platforms that allow you to “set it and forget it” in case you are tempted to withdraw funds for leisure expenses. Pursue high-yield savings accounts with good interest rates in line with professional financial advice, and automate transfers from your main accounts so that you can’t forget to manually transfer money each month.
Keeping an eye on inflation and increased cost of living, depending on the market you live in but increasingly nationwide, is a smart move for your personal finances. If cost of living goes up across the board, you know to anticipate setting more money aside to account for the changing times. The last thing you want to get with is a shortage of funds because costs are rising outside your control and beyond your knowledge base. There’s a reason that high money investors often start their days reading the news! The Federal Reserve has released some really handy tools (aggregated here) to help you monitor inflation in real-time if you are interested.
Review and Rebalance Your Investment Portfolio
Check where your assets are allocated: stocks, bonds, real estate, physical assets, or somewhere else? It might make financial sense to move around investments to higher-yield entities. Maintain a target risk tolerance: how comfortable are you with riskier investments that might make you more money but produce less stability in the long run? While we can’t answer that question for you, a First Light advisor can open a conversation on your personal risk tolerance and help you adjust your investments accordingly.
Consider evaluating tax-advantaged accounts like contribution limits to your 401(k), IRA, or Health Savings Accounts. We’ve written extensively in the past about retirement savings, and Q2 is a great time to take a look at how your accounts are doing and consider contributing more if you’ve got cash to spare.
Organize Financial and Tax Documentation
If you haven’t already, now is the time to archive your tax returns and supporting documents before Tax Day sneaks up on you. Having everything laid out and in good order will reduce stress when it’s time to actually file. Most people can safely keep tax documents for three years, the official statute of limitations from the IRS. But unique scenarios like under-reporting income or claiming certain losses can necessitate longer retention periods. If you want to be extra safe, many experts recommend keeping supporting documents for 7 years and filing returns permanently.
Now is the time to update your financial account access and beneficiaries to ensure that family members or other loved ones can access important information if needed. Check out this Fidelity guide on updating beneficiaries to ensure your legal documents are up to date.
Finally, use encryption and employ heavy security practices for digital document storage systems. Having everything available to you online is great, but it also makes you prone to phishing scams, hackers, system crashes, and more.
Turn on two-factor authentication for all your accounts and consider using a physical Yubikey for extra protection when logging onto your most high profile and high risk accounts. Never use the same password twice, use an email service provider like Proton that respects your data privacy and has increased security measures, log out when you’re not actively using an account, and consider connecting to a VPN when you are reviewing sensitive information to prevent data leakage by your internet service provider.
Prepare for Upcoming Milestones
A deeply personal section: what is coming up in your own life that will require strategic financial planning? Do you have summer travel plans, home improvement projects that will require significant up-front investment, or education and tuition expenses starting in the fall? Taking stock of your finances starts with taking stock of your life. The point of having an intelligent fiscal roadmap is to benefit your life and make things easier as you go through different seasons. You aren’t reading this article for no reason: you clearly have the desire to get your finances in check so that the rest of your life benefits. A good step toward that goal is to assess what is up coming in the near and longer-term future that may require heightened financial attention.
In Conclusion
Progress is paramount! If you haven’t already, consider establishing a quarterly financial review habit. Breaking down your annual goals into smaller chunks can be a great way to ensure you’re on track and adjust course as necessary. The benefits of a structured Q2 financial review can’t be overstated: Consult a First Light Financial advisor today who can help you achieve small goals on the way to your overarching financial ambitions.
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Advisors associated with First Light Financial Planning may be either (1) registered representatives with, and securities offered through LPL Financial, Member FINRA/SIPC, and investment advisor representatives of Great Valley Advisor Group; or (2) solely investment advisor representatives of Great Valley Advisor Group, and not affiliated with LPL Financial. Investment advice offered through Great Valley Advisor Group, a registered investment advisor. Great Valley Advisor Group and First Light Financial Planning are separate entities from LPL Financial.
Member FINRA/SIPC: www.finra.org/www.sipc.org
Kris Money is solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.