Personal Annual Financial Review: Part 2: Savings & Debt Analysis

Next it is time to have a look at your savings and debt. This is also known as your net worth. We will examine each separately starting with debt. This part of the review is to make sure that we are on track to get out of debt and reach our longer term goals. We grade ourselves on how we are doing and make adjustments to get there!

Debts:

• Credit Card: This is the top priority to pay off. It is generally the most expensive form of debt and can really hinder our financial progress. Now is the time to examine balances, minimum payments, and amount of credit card debt. Check your budget to see how much you have allotted to payments and attack the lowest balance first until they are all paid off!
• Auto Loans: These are loans in depreciating assets. If your credit cards are paid off this is the next one to accelerate payments on. It can be worse if you have an accident and the car is totaled and you are left with no car and a loan to pay. Pay as aggressively as you can to clear this debt off!
• Student Loans: A lot of us have had to borrow to cover the rising costs of a college education. Luckily for us the interest is tax deductible and usually pretty reasonable. These loans are an investment in yourself but would be good to pay off early. I would only pay more than the minimums here if you have adequate (6 month+) emergency funds saved already.
• Mortgages & Home Equity: These are loans against (usually) appreciating assets and are considered good debt. The main thing to examine here are your interest rates to see if it is worth it to refinance (more than 0.75% drop in rates). Only accelerate payments if you are nearing retirement age as you want this paid before you hang up your work gloves!

Savings:

• Emergency Fund: This is the most important savings you can have. I recommend having a minimum of 3 months of expenses saved. Others say 6 or even 9 months. This should be funded before any acceleration of debt payments including credit card debt. Paying more on your credit cards with no savings can get you right back into credit card debt again if an unexpected expense or job loss occurs.
• Bill Escrows: Make sure your irregular bills are covered using a savings account to accumulate money for when the bill is due. Examples: Property taxes, annual dues, car registration, or insurance premiums.
  
• Goals: If you are saving for a big ticket item such as a car, house, or dream vacation make sure you are putting enough into this account each month. This should also be covered in your budget review!
• Retirement savings and investments will be covered in Part 3.

One final note about savings: For your cash savings you need to shop around for interest rates. Compare your current rate with other banks to be sure you are maximizing your earnings. Bankrate.com is a great place to comparison shop. Open accounts and move your money if needed. Also make sure you are using the correct vehicle to reach your goal by using savings, money market, or CD's. CD's are great for longer term goals to earn more interest! Try to match the CD term to your goal time line.

Now that we have looked at everything it is time to see how we are doing! Calculate your net worth by adding up all your assets: Cash, Savings, Investments, House(s), car(s), and anything else of value that you have. Now subtract all outstanding debts from that amount. The result is your net worth. Those of us with a lot of debt may have a negative number. It is good to record this to compare in next year's review. It is a good gauge of how we are doing!

Next week I while show you how to review all of your investments. This is the most important step to stay on track for retirement and financial freedom!