Happy New Year! It is the time of year where we review what we have done and decide what our resolution will be for the year to come. I would like to add a resolution to everyone’s list: review and improve your finances.
Here are ten steps to get you on track:
1. Net Worth
One of the first steps in calculating your net worth. If you know it, take the time to update it. First, add up your assets. Second, calculate your total liabilities (credit cards, student loans, personal loans). Subtract your liabilities from your assets and you arrive at your net worth. Net worth is a great indicator of your financial position at a given time. If your net worth is negative, vow to decrease the amount of debt you have by the end of the year. If your net worth is positive, think of methods to increase it through the year. Watching your net worth and/or credit score increase will provide your own satisfaction and reason to save and invest.
2. Play Defense
As you grow your net worth, you want to cover large expenses. Ensure you have an emergency fund available for unforeseen circumstances. The average American does not have $400 available to cover an emergency. Avoid this by slowly creating and funding an emergency account to cover 3 to 6 months of expenses in a liquid account.
3. Make the Unknown Known.
Check with your employer’s HR department and review your benefits. Review your disability policy and understand the benefit amount and length. Review your life insurance policy and make sure it covers your family’s annual expenses for the number of years it will take you to reach full retirement age. If you do not have life insurance or it is too expensive, at least get a term policy to cover final expenses. Review your health insurance policy and see what benefits it provides (make sure you are taking advantage of those free checkups and dental cleanings!!). Look into your retirement plan and see how it has performed, what the investment options are, if there is an employer match, and especially what the fees are.
4. The Dreaded Credit Card Statement.
Every year you should analyze your budget. Realize where you are spending money and if you need the things you are buying. You would be surprised how many streaming, gym, and other subscriptions people pay for monthly and use only a handful of times or not at all. Sometimes seeing the amount spent (especially food delivery fees) is enough to make you reduce or stop the spending altogether. Once you cut those expenses, consider it a raise to yourself and add it to your emergency fund or investments.
5. Make Tax Time a Happy Time
Tax planning should not start on January 1 of the filing year. Tax planning requires a year-round strategy. Try to consider the tax consequences of any decision before you make it. If you are self-employed, an accountant is beneficial, but allowing a financial advisor and accountant to work as a team for you can help maximize your savings and strategies.
6. Investments and Retirement
Speak with your spouse and/or financial planner and determine when you want to retire, what you want to do in retirement, and how much you will spend annually. While it may be a decade or two away, planning can help you shift investment allocations, increase contributions, and reduce anxiety.
7. Retirement Spending
If you have completed step 6 and are nearing retirement, consider how much you will be earning through Social Security, what your required minimum distribution amounts are, and if you would like to purchase any annuity plans. There are more strategies for spending and income in retirement, but once you can determine how much you need and how much you are making, it provides you with a sense of what is needed and what can be distributed to children, grandchildren, and charities via gifts or inheritance.
8. Long-Term Care
DO NOT rely on Social Security or Medicare to fulfill your needs. This topic is relevant for those in their mid to late fifties and older. The average cost of long-term health care in the United States is roughly $105,000 and will likely increase annually. (1) There are asset-based care policies providing Long-Term Care benefits and can be paid using tax-free funds. Do not deplete your family’s assets and potential for generational wealth when you can handle it for far less damage by planning now.
9. Estate Planning
Update your will to include a current inventory of assets and the family members you want to receive them. Even more important, discuss the plan with your loved ones, financial planner, and estate lawyer to determine the best strategies and reduce confusion.
10. Hire a Financial Professional
Some of the common concerns I hear are people who believe they do not have enough money for an advisor, don’t trust the financial system, or can do it all themselves. I believe things are easier to accomplish with a team. Working, building a family, health issues, personal time, pets, etc. leave a small window to handle all the minutiae of financial planning. Many financial advisors will offer a free consultation allowing you to understand the financial planning process and build rapport. If you find an advisor you are comfortable with, the benefits will greatly outweigh the cost.