Entropy is the idea that things left alone will become less ordered. Put another way, things fall apart over time if you don’t take care of them. It is a great way to view your finances. It shows the need for a regular review process. Without a regular review process, your finances tend to get out of whack over time. Things that were in order are no longer so. This creates unknown risks, which can be dangerous. You may have had things in order at one point but no longer.
It's kind of like cleaning house. Some people do one big deep clean every year or two (or whenever they move). It’s a massive undertaking. It feels so good to have everything clean and put away (or thrown away). It is also exhausting. And if you are like me, you swear that you won’t let things build like that again. You make a goal to clean one room a week or some other very manageable goal. If you just stuck with the schedule things would never get crazy and unmanageable.
How long does that last? A week? A month? For most of us, not long. And, if we miss a week, entropy takes over. It slowly brings chaos to our carefully constructed order. And thus, the cycle begins to repeat itself.
Your finances are no different. They too need a regular “deep clean," or what started out as a well-ordered plan will collapse into anarchy.
Here are some examples…
Your credit report. When was the last time you checked your credit report? I’m not talking about your credit score, but your credit report. If it’s been a while, this is a great thing to do. Over time, incorrect information can build up at the credit bureaus. You may still have accounts that are open that you thought you had closed. This is also a great way to discover if accounts have been fraudulently opened on your behalf. If so, I recommend taking steps to close those accounts.
Your investment portfolio. Over time, your portfolio can become too aggressive or too conservative. Do you know what your risk score was when you started compared to where it is now? Do you know where it should be based on your finances, not internet rules of thumb?
Tax return review. Taxes are most people’s biggest expense. A 1% tax cut can greatly affect your finances for life. Do you know what levers you can pull to make your taxes go up or down?
Not to mention, have any of your goals changed? Has there been a birth, death, marriage, or divorce in your family? Are you approaching an age milestone at which different IRS rules apply to you?
Yes, this is how I make a living, but my business exists to help people like you. I want to prevent entropy from wrecking your finances when it exposes you to risks and disorder.
I have worked with hundreds of clients. Almost everyone has their financial plan cleaned up and put in order at some point. But without regular reviews and revisions, entropy slowly eats away at your plan. Incorrect info builds up. Your portfolio becomes off-kilter. You slowly start to overpay on taxes.
Don’t let this happen to you. Set up a regular review of your financial goals, cash flow, investments, taxes, insurance, and estate plan.
Contact us today if this is something you would like help with.