February 28, 2024

Do’s and Don’ts For Tracking Your Financial Plan

In personal finance, understanding the most effective strategies for monitoring financial health is crucial. Many individuals fall into the trap of overanalyzing every single financial transaction, mistakenly believing that meticulous tracking of every expense is the key to financial stability. However, such practices can lead to unnecessary stress without significantly contributing to financial wellness. With a plethora of tracking methods and financial advice available, distinguishing between what genuinely aids your financial health, and what doesn’t, can be overwhelming. However, the essence of effective financial management lies not in meticulous over-tracking but in understanding and focusing on the factors that truly matter.


Chasing a Perfect Credit Score

A common misconception in financial planning is the overemphasis on achieving a perfect credit score. While maintaining a good credit score is essential, the pursuit of a flawless 850 score is largely unnecessary. High credit scores, indeed, open doors to better loan rates and credit opportunities, but once you’re above a certain threshold—say, 770—the benefits plateau. The difference between a very good score and a perfect score is negligible in practical terms, and it certainly shouldn’t halt your financial progress or decision-making.

Over Tracking

Another trap individuals often fall into is the excessive tracking of every single expense. While being aware of your spending is crucial, obsessing over every $20 spent here or there can lead to unnecessary stress without significantly benefiting your financial situation. This approach can distract from focusing on broader, more impactful financial strategies.

Moreover, tracking every minor expenditure can create a false sense of control over one’s finances. This approach often overlooks the bigger picture, focusing too much on minor details rather than on overall financial health. Instead, individuals should aim to understand the broader trends in their spending and saving habits

Market Watching and Improper Benchmarking

Tracking your investment portfolio on a daily basis and comparing the performance of a diversified portfolio directly against the S&P 500 is not a healthy financial tracking mechanism. This approach can lead to unnecessary stress and may result in short-term, reactionary decisions that deviate from your long-term investment strategy. The S&P 500, while a useful indicator of market trends, represents a specific segment of the market, primarily large-cap U.S. equities, and does not reflect the breadth and diversity of a well-rounded investment portfolio that may include bonds, international stocks, small to mid-cap stocks, and other asset classes. Constantly benchmarking against this index can skew your perspective, overlooking the benefits of diversification, such as risk reduction and exposure to a broader range of growth opportunities. It’s important to focus on your personal financial goals, risk tolerance, and investment horizon, rather than the daily fluctuations of the market or a single index’s performance


Reverse Budgeting

Adopting a system like reverse budgeting can streamline your financial management. By categorizing expenses into fixed and variable and automating the fixed payments, individuals can ensure that essential bills and savings goals are met without micromanaging every transaction. This method allows for a more flexible and guilt-free approach to spending on day-to-day needs and wants, emphasizing the importance of a sustainable financial plan that accommodates for both savings and enjoyment of life.

Ensure Big Expenses- Homes, Cars- Are Properly Benchmarked to Income

It’s also critical to look beyond visible signs of wealth, such as fancy cars or houses, as markers of financial health. A big house or luxury car doesn’t necessarily equate to financial stability. Instead, focusing on key financial ratios, like ensuring your housing costs are below 30% and vehicle costs are below 10% of your net income, can provide a more accurate reflection of your financial wellbeing.

Track Your Net Worth

Track your net worth over time—your assets minus your liabilities—this offers a straightforward yet comprehensive view of your financial health. This figure is a more meaningful indicator of financial progress than the fluctuating market values of your assets or worrying about daily stock market changes.

Protect Your Plan Through Risk Management

Protecting one’s financial plan from unforeseen risks is paramount. This an often-overlooked aspect of financial planning is risk management. Even if you track your spending and commit to saving, without the right insurance and protective measures in place, your financial plan remains vulnerable. Understanding and regularly reviewing your insurance needs, including life, health, disability, and possibly umbrella insurance, can safeguard your financial future against unforeseen events. As life circumstances change, revisiting and adjusting these protections is essential to ensure they continue to meet one’s needs.

Click here to learn more about navigating life insurance and risk management in your financial journey.

Ultimately, the goal of financial planning is not just to accumulate wealth but to facilitate a lifestyle that brings you satisfaction and fulfillment. This means focusing on increasing your savings rate as your income grows, thus ensuring that you’re not just working to maintain a lifestyle but actively building towards your future.

Financial planning is more than just numbers on a spreadsheet; it’s about creating a plan that aligns with your life goals, values, and aspirations. By focusing on what truly matters, you can build a financial plan that not only ensures your financial health but also enhances your quality of life.

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Important Disclosures:

Securities and advisory services offered through EWA LLC dba Equilibrium Wealth Advisors (a SEC Registered Investment Advisor).
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage is often obtainable in commodity trading and can work against you as well as for you.  The use of leverage can lead to large losses as well as gains.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.

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