Personal Finance Exercises for the New Year, Part III
For the past two weeks, we’ve outlined the personal finance exercises I want you to undertake for 2012. This week, we have Part III of our series, which will be of particular interest to investors with a focus on income. Recall that the first installment was all about taking an inventory of all of your assets. Part II was to do an asset allocation review. Today in Part III, it’s time to think about cash flow.
In my experience, most people don’t think about their income as much as they do their expenses; however, the beginning of a new year is a great time look at all of your existing—and potential—income streams. Now, this exercise is extremely important if you’re in retirement or transitioning into retirement, but it’s also very important if you’re still working.
Remember that your goal when investing is to increase your net worth. You can do this by making good investment decisions, but you also can do this by saving more money. The bottom line here is income minus expenses. We will get to expenses portion of this equation next week, but this week it’s all about income.
Income is something that can, and should, come from multiple sources. When you finally reach retirement, you’ll want multiple income streams. Here are the categories of income for most people currently working:
- W-2 income (wages earned and taxes withheld)
- 1099 income
- Rental income
- Investment income (interest and dividends from your taxable portfolio)
- Royalty income (energy and oil & gas funds)
- Business ownership (profits from a small business or side business
- Alimony/child support
For retirees, the categories for income streams also include:
- Social Security
- Pensions
- IRAs (required minimum distributions or withdrawals from retirement accounts)
- Other retirement plan distributions
This week, I want you to calculate all of your current (and projected) income, and figure out what’s coming in monthly and annually. Your goal here is to add up your total income, as you want to how much cash flow you’re expected to get this year. Completing this exercise is critical to determining the kind of net income you’re going to have in 2012. Knowing what you have coming in is the first step in increasing your net worth, so be sure to complete this personal finance exercise before next week.
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