Mistake to Avoid: Not Monitoring Your Financial Progress and Measuring Results

Financial Resources

Taking control of your financial future is a process. And as with any process, it is important to monitor your progress and measure the results. Doing so will help you understand how well you are doing and to determine if the financial strategies you are using are working.

A balance sheet provides a business with a snapshot view of its financial status. An income statement measures its progress. With your own personal finances, you can and should do the same.

Monitoring Progress
Preparing a personal balance sheet annually should be part of your financial management. You simply add up all you assets and subtract your liabilities to determine your net worth.

When preparing your personal balance sheet, separate you investment assets into stock, bond and cash categories. Understanding you personal “asset allocation” will help you organize your finances and monitoring of them. Many financial institutions provide financial statement formats as part of loan applications. You can also find examples in almost any financial planning book. It also makes sense to track changes from year to year to monitor your progress and determine if you are on tract to reach your financial objectives. You may consider using a chart that provides a basic yearly format.

Measuring Your Results
The other step, and the one that is more difficult, is determining how well you are doing. Determining your “absolute results” or has your net worth increased from year to year is easy. Determining your “relative results” or how well you are doing compared to the rest of the financial world is not easy. If your stock portfolio went up 15%, that is good if the overall market was only up 10%. However, if the market was up 23% during that same period, a return of 15% is not so good.

Measuring your results can be difficult in two ways. First, just doing the calculation can be complex, especially if you added or withdrew money from your portfolio during the year. It is also difficult to know what formula to use.

There are rate-of-return calculation tools in many computer software programs. If you are using a spreadsheet program, use the internal rate of return function to calculate the total return on your portfolio.

Second you must have some basis of comparison to measure how well you did compared to a benchmark. If your portfolio is all stocks, you may want to compare your returns with those of an index like the S&P 500. If you portfolio is all bonds, you may want to use the return on long-term government bonds as a comparison.

You can also compare your returns with quoted mutual fund returns. But remember to compare with a fund that has a similar make-up of its portfolio. If you are a conservative investor with a portfolio of blue chip issues, don’t compare your returns with an aggressive small company mutual fund.

Next Steps
If your results meet your expectations, keep doing what you are doing. If your results don’t measure up, you may want to take actions to improve them. This could include changing your stock selection process, urging your stockbroker to help you make better decisions, giving the responsibility to a professional investment advisor or choosing a different mutual fund.

Financial articles provided by WestStar Bank are for information purposes only and are not to be construed as tax or investment advice. Please consult with a tax and/or investment professional if you have any questions or doubts about any of the information contained in the articles.

Products: WestStar Money Market, Money Market Savings, Portfolio Management

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