Create Your Personal Financial Inventory
Your personal financial inventory is important, because it gives you a snapshot of the health of your bottom line. This annual self-check should include:
- A list of assets, including :
- your emergency fund
- retirement accounts
- other investment and savings accounts
- real estate equity
- education savings
- etc. (any valuable jewelry, such as an engagement ring, belongs here, too)
- A list of debts, including:
- your mortgage
- Loans (i.e. student loans, car loans, credit cards, and other loans)
- A calculation of your credit utilization ratio, which is the amount of debt you have versus your total credit limit
- Your credit report and score
- A review of the fees you’re paying for apps or unused services. You’d be surprised by how much one could be spending or unused services.
Set Financial Goals
Once you have your inventory completed, you can move on to setting goals for the remainder of the year or even for the next 12 months. Your goals should be divided into short-term, mid-term, and long-term goals.
An example of your short-term goals might be:
- Establish a budget
- Create an emergency fund or increase your emergency fund savings
- Pay off credit cards
Your mid-term goals could include:
- Getting life insurance and disability income insurance
- Buying a home or large ticket item, refinancing debt, renovating, moving, or saving for college
Long-term goals could include:
- Determining how much of a nest egg you’ll need to save for a comfortable retirement
- Figuring out how to increase your retirement savings
- Planning alternative income streams
- Tax Planning
Focus on Family Planning
If you’re married, there are certain things that you and your spouse should be thinking about on the financial front. These are some of the items that may be on your punch list:
- If you have children, determining how much you’ll need to save for future college expenses
- Choosing the right college savings account
- If you are caring for elderly parents, investigating whether long-term care insurance or life insurance can help
- Review your own life insurance coverage – you may not have enough or even too much
- Starting to plan how you and your spouse will time your retirement, including your Social Security claiming strategy
Review Your Retirement Savings Plans
Saving for retirement in an individual retirement account (IRA) or a 401(k) is a smart way to enjoy some tax advantages. As you put together your annual financial plan, you should consider whether you need to:
- Decide whether a Roth or traditional IRA is best for you now
- Consider working with a Financial Planner for your existing IRA
- Consider converting a traditional IRA to a Roth IRA (times when either your income or the value of your account is lower are especially good for making this change at the lowest possible cost)
- Do the same for your 401(k), which can also be Roth or regular
- Roll over any old 401(k) accounts from a previous employer to you IRA
- Increase or decrease your annual contribution amounts to retirement accounts (discuss with your Financial Planner the best options)
Review Your Investments
It’s vital to review where your investments are, especially during a market shift, such as the current environment.
- Check your asset allocation. If stocks are taking a dive, for example, you may consider adding defensive investments to offset some of the volatility.
- Figure out which investments will do the best job of meeting your asset allocation goals—and whether your current investments still fit your short, mid, and long-term objectives.
When making your plan, don’t forget to consider the tax implications. If you’re selling investments at a profit, you’ll be responsible for paying short- or long-term capital gains tax, depending on how long you held the assets. This step can wait until the end of the year. When you get to that point in time, you’ll want to consider these strategies:
- Harvesting tax losses by replacing losing investments
- Looking into whether you should offset capital gains and losses
- Investigating whether it makes sense to use appreciated securities to make charitable donations or support lower-income family members.
Update Your Financial Emergency Plan
As the nation, if not the world, has certainly learned, a sizable emergency fund is helpful when financial troubles descend, so be sure you have socked away adequate resources. While you’re at it, look at your broader emergency plan as a whole.
- If you don’t have three to six months’ worth of expenses tucked away, building your emergency savings should be a top priority.
- Invest in insurance: Are you covered for a temporary disability, for example?
- Make sure you have a financial and medical power of attorney in place.
Look Ahead to Future Savings
As you move through the year, think about where else you could be saving money to fully fund your emergency savings and put aside more for the future. Consider whether you should:
- Refinance your mortgage
- Rethink your car insurance
- Lower your food bill
- Utilize flexible spending or health savings accounts
- Cut the cable TV cord
- Curb your energy bill
- Divert your paycheck to savings by contributing more to retirement accounts or funneling money directly from your paycheck to an emergency savings account
Work on Building Alternative Income Streams
A 401(k), pension plan, or Social Security benefits may all be potential sources of income in retirement, but they’re not your only options. Figure out what else you could build in.
- Investing in a rental property and becoming a landlord could be an alternative for some.
- Others may want to look at getting a part-time job or consulting.
- If your financial resources are less than desired, and you meet the criteria (age, home ownership), you may want to investigate whether a reverse mortgage is a good option for you.
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