Each fall, when the clocks have turned back an hour for daylight savings time, we know the end of the year is approaching. The final 60 days can pass in a blur of food, family, and festivities. But this is also a key time to give your finances a year-end going over before the new year starts.
Just like you assess your physical health with a yearly visit to your primary care physician or healthcare provider, you will want to gauge your financial health before the year’s end. Let’s look at what a year-end financial checkup includes and what actions we can take before we ring in the new year. Plus, links to helpful resources!
Year-End Financial Checkup
An annual checkup aims to find out what’s working and what’s not. At a routine physical, our doctor lets us know how we are doing health-wise and where our well-being could improve. They give us a drone view of what’s going on in our bodies.
Likewise, with a financial inventory, we can see how we are doing and what needs to change for us to remain fiscally sound.
Ideally, you set some goals at the beginning of the year and record them for periodic review. Your goals may have included areas such as budgeting, debt elimination, emergency fund, estate planning, insurance, investments, retirement accounts, and savings.
● Budget. Was the budget you set for this year realistic? With inflation and the rise in the cost of just about everything, were you able to adjust and stay on course, or did you blow past it?
● Debt Elimination. If you are paying down a debt of any kind, how successful were you this past year? Did you stay on your proposed payment schedule to help eliminate it, or was that abandoned at some point?
● Emergency Fund and Savings. How is your emergency fund coming along? Did you add as much money as you would have liked to add to it? Where did you fall short of this year in your savings plan? It is recommended to have at the very least three to six months of income saved. Some financial planners now say that having six to nine months may be better.
● Estate Planning. Life changes quickly. What changed in yours this year? Were there births, deaths, divorces, or marriages in your immediate family?
● Insurance. Did you have any accidents, natural disasters, or health problems this year? Were you adequately insured to cover those costs?
● Investments. To say this year was topsy-turvy in the stock market is an understatement. How did your investment portfolio perform? Did any rebalancing of your allocations occur?
● Retirement Accounts. Have you maxed out your 401(k) or IRA contributions yet this year?
Year-End Action Plan
After our annual visit with our doctor, we come away with a clearer picture of our current health. Normally, there is also a care plan of what we should continue doing and what changes we need to make for better health. This requires action on our part!
Financially it is very similar. Now that we have audited this past year, we have a richer understanding of what we can do to improve our finances in the coming year. Let’s look at the same areas we addressed earlier and this time plug in the actions we can take.
● Budgeting. A budget is a spending plan. It is a priority to manage the influx and outgo of money each month. Think about where you are “bleeding money” and the changes that you need to make to next year’s budget. Consider budgeting software to help you do it.
● Debt Elimination. High credit card debt is especially draining to one’s financial health. Consider what changes you can make to get a handle on it.
● Emergency Fund and Savings. There is a reason that emergency funds are necessary. Emergencies happen! A sudden job loss, business closure, or health challenge can leave you without income for several months. If you don’t have an emergency fund yet, start small. There are many creative and pain-free ways to save money and help you build your emergency fund and savings.
● Estate Planning. What adjustments are you going to make to your advance healthcare directive, will or living trust, the beneficiaries, or your powers of attorney? Think about how you want to transfer your wealth to the next generation and how that can best be accomplished.
● Insurance. Be certain that you review your auto, disability, health, and home insurance and make any adjustments. Take advantage of your employer’s open enrollment window and adjust your healthcare coverage as needed.
● Investments. Assess your portfolio with your financial adviser to review if the investments you currently have will help you reach your financial goals. Consider what in your portfolio can be rebalanced. Perhaps you can also harvest a tax loss.
● Retirement Accounts. There’s still time to contribute to your 401(k) and IRA accounts in order to max them out. Think about any changes you want to make or additional accounts to acquire. If you are of retirement age, don’t forget to take your required minimum distribution (RMD) from your IRA so you can avoid the 50 percent penalty.
Be sure to take a few hours between now and New Year’s Eve to review your financial state of health this year. Once you have an idea of which goals were met and which ones were not, you can put together an action plan to change how you reach your financial goals. A little forethought will help to ensure that the coming year is one in which you are healthy in every area of life.