Cleaning up personal finances remains one of the top resolutions every New Year. But we all know what happens to most such self-promises, so here’s a month-by-month to-do list to help cultivate better financial health.
January: Organize paperwork. This starting point eludes many. Are your financial documents organized, in paper and/or virtually, so information is at your fingertips? Your heirs will be eternally thankful if you unexpectedly die or are incapacitated.
February: Consolidate investments. Trim your number of accounts and consolidate all your dormant 401(k)s into individual retirement accounts. Spreading your assets across various brokerage accounts is not smart diversification – it’s a recipe for confusion.
March: Follow the money. If you’re still working and too busy with your life, you may have a poor sense of your personal cash flow, the money that comes in and where you spend it. You can’t establish how much you save or spend without knowing where you are right now.
April: Tax smarts. It can be better, sometimes, to owe taxes in April or October, instead of overpaying all year. Which is not to say you should forget quarterly estimated payments if you may be self-employed!
Did you fund an IRA (or Solo 401K) for your spouse, max out funding your own IRA or employer-sponsored plan? Convert any IRA accounts to Roth IRA? Did you do any tax-loss harvesting last year?
May: Investment smarts. How much do your investments cost you? Do you know what your insurance agent, 401(k) plan, financial professional, tax advisor charge for their services? How about the additional expenses you pay to buy mutual funds – and inside those funds. The commissions on purchasing exchange-traded funds?
When’s the last time you sat down with your broker or advisor to talk over your investment objective, tolerance for the risk of financial loss, time horizon, legacy gifting intentions? Tax-wise strategies?
How much risk do you take? If your investment objective is ‘growth’, are your investment assets properly allocated across ‘ownership’ (‘equities’) and fixed income (debt obligations that pay interest and return principal at the end of a term)?
June: What are you worth, and why does it matter? If your financial planner doesn’t provide you with a data aggregation tool and software that does this for you, you can calculate your net worth yourself. Just add up all your assets (for some people, big ones may be your home, boats & automobiles, bank and investment accounts) minus all your liabilities (for example, mortgage, auto, and credit card debt). A sophisticated net-worth calculation projects factors of asset growth such as rates of investments’ returns and risk and your rate of saving and liabilities to the end of your life.
Your goal: Minimize the risk of outliving your assets.
July: Insure against risk. Insurance keeps you financially whole if disaster strikes. Have you considered long-term care insurance? This coverage helps with costs of meeting basic daily needs over an extended time beyond what Medicare will cover.
August: Retirement planning. This planning starts in your 20s and does not end when you retire. If you’re employed, know when you can afford to retire (even if you might not choose to quit working then).
Are you aware of strategies that maximize Social Security payouts? If retired, are you withdrawing from your accounts in the correct sequence? (Start with your taxable holdings, then move on to tax-deferred and then untaxed.) Are you converting traditional IRA to Roth IRA accounts, to minimize the amount of fully taxable Required Minimum Distributions you eventually will be obliged to add to your annual taxable income? Roth conversions and other strategies to minimize IRA distributions can trim your taxes.
September: Gift wisely. You can give back in many ways to organizations and people you care about with donations of appreciated securities or with payments on college loans or new mortgages. The Internal Revenue Service offers several guidelines on gifting.
There are many ways to gift financial assets. Maybe you might want to retain a lifetime cash flow, while making a lifetime gift that helps a favorite charity plan its own financial path forward, while taking a tax deduction in the year of your gift. Or, maybe gift the income, but keep ownership of the principal for legacy gifting to family members. Your greatest gift may be taking care of yourself so you don’t eventually become a financial burden to your adult children.
October: Preparing for the inevitable. Engage an estate attorney. If you die without a will, your state of residency distributes your assets with no input from you.
If your estate documents are older than about seven years, refresh them. Everyone needs such estate documents as wills, living wills, medical health-care directives and powers of attorney to stipulate your wishes if you become unable to decide matters yourself.
You especially need these papers if you or your spouse, or both, are uncomfortable with financial matters and your children are younger than legal age.
Also, draw up or re-examine these documents if:
- You’re in a second marriage
- You own property in or reside in more than one state
- You’re concerned about privacy
- You own a business or
- Your family must consider special needs.
November and December: Reality check. If you followed these steps, you’re in the minority of individuals with the tenacity to tackle financial planning.
But you still should engage a financial professional to check your assumptions. Be realistic about what you can accomplish on your own.
It’s important to get your finances right and keep them right all year.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
The insurance content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.