Sure, physical fitness is a common New Year’s resolution to get our bodies back in shape, especially after all the damage from the holiday season, but how about our finances? They typically suffer as well during all the holiday shopping for presents and entertaining. A new year presents new opportunities to get ourselves on the right track towards financial well-being.
1. Put together a net-worth statement
So much information can be gathered from reviewing a personal balance sheet and understanding all the details of each asset and liability. It also serves as an exercise to get your arms around everything you have, what it is, where it’s held, the balance, how it’s structured, who owns it, etc. This tool helps you now, but also is very helpful to the executor of your estate as s/he is responsible for gathering all of your assets and liabilities should something happen to you. An internet search for a personal balance sheet or net worth statement will yield samples to follow. We could also provide one if you contact us.
2. Develop a spending plan and keep at it for lifetime
Getting the balance sheet in order can be difficult because each dollar is pulled in multiple directions—saving, debt, college, lifestyle, etc. Have hope. Most people can free up more cash by understanding what they spend their money on in a year and making informed decisions off that information. A spending plan is important at every stage of life—pre-retirement when you’re accumulating, and in retirement when you’re trying to preserve what you have. Knowledge is power. Maybe those coffee stops add up to more in a year than you thought. How about all those times dining out? Do you pay for premium cable channels or streaming services you never use? Could you spend less at the grocery store? Could you go with fewer minutes or data on your cell phone plan if you manage usage? Possibly there are things you could do to save on your energy bill. Perhaps there are ways to vacation more conservatively if need be. The key is to add expenses up over a year to get the full impact of the costs and potential savings opportunities. Little things add up to bigger, more meaningful things, so even little savings steps can make a big difference. The proverb, “Little drops of water make a mighty ocean,” is right on point.
3. Manage debt
Get a handle on all of your debt—the balances, interest rates, monthly payment, and maturity date. Does it make sense to refinance your mortgage before rates go up further? Do you have a home equity line of credit with an interest rate that will float up as rates rise? Perhaps you could refinance that with the mortgage. Though it makes financial sense to pay other debt down by focusing on the highest interest rate balances, many people are more successful by first paying off the lower balances. The cash that’s freed up by eliminating a monthly payment can then be applied to the next smallest balance, and so on. It’s motivating to see balances disappear by the snowballing effect, and you’ll be more likely to stick with it.
4. Shape up your emergency fund
Your emergency fund should be approximately three to six months of living expenses, and more if you have job insecurity or are retired. While you’re paying down debt, you might only be able to have a couple of months of living expenses saved. Consider an online high-yield savings account to hold your emergency reserves. Having a home equity line of credit open and ready to go (but untapped) is also helpful in an emergency. Typically, you can’t get one approved when you have certain emergencies, such as a job loss.
5. Add to retirement savings
There are no loans or scholarships in retirement, so this should be a priority. Retirement can be costly, but just how costly depends mostly on your lifestyle. Some people can get by on very little, whereas others need a significant amount of savings to support a high lifestyle. Either way, the more you can save as early as you can, the better prepared you will be. It’s never too late to start. Consider increasing the amount you contribute and likely your lifestyle will adjust to the slightly lower paycheck. Split raises by increasing the amount you contribute to retirement by half of your raise and leaving the rest for an increased lifestyle. If you own a business and don’t have a company retirement plan, consider implementing one of the various options. Otherwise, contribute to an IRA or supplement other retirement plan contributions with contributions to an IRA, even if the contributions are nondeductible.
6. Consider a Roth IRA
If you qualify, contribute to a Roth IRA for tax-free growth opportunities and other distribution advantages. If you don’t qualify to contribute directly to a Roth IRA and don’t have any other IRAs with pre-tax balances, you could do a back-door Roth IRA by making nondeductible contributions to a traditional IRA then converting to a Roth IRA. Consider if it makes sense to convert pre-tax traditional IRAs to Roth IRAs. Also, fund Roth IRAs for working children if you’re looking for gifting strategies.
7. Save for college
If you can afford it (knowing retirement savings should be a priority), contribute systematically to a 529 college savings plan for your children’s (or grandchildren’s) education. New York’s plan offers residents up to a $5,000 tax deduction per taxpayer ($10,000 if filing jointly) even if the funds flow through the plan temporarily. Supplement that by registering at www.upromise.com to earn free college savings dollars for things you buy. Be sure there is a contingent owner on the account to simplify its passage should something happen to you.
8. Review your investment strategy
Don’t neglect your investment strategy in your employer retirement plans, IRAs, 529 plans, personal investment accounts, variable annuities or variable life insurance. A good asset allocation among all the asset classes allows you to maximize returns while minimizing risk. Tax efficiency should be a consideration in taxable/nonqualified accounts.
9. Review insurance needs
Review your homeowner’s, auto, individual and group life, disability, and long-term care insurance coverage and need. If you have sufficient cash flow or cash reserves, perhaps you could increase the deductible on your homeowner’s and auto coverage to save on premiums. Do you have sufficient life and disability coverage should something happen to you? Would you or your family be provided for? Or perhaps you no longer need the coverage you have due to your current circumstances and financial situation, then it’s a matter of choice. How would you pay for long-term care services should you or your spouse need care? Does long-term care insurance fit your situation, and can you afford the premiums?
10. Review estate plan and beneficiary designations
Your estate plan is more than just your will, power of attorney and healthcare proxy. It also involves your asset titling and beneficiary designations, as those also decide how assets will pass to your heirs. Understand how all of that comes together to make sure it would work the way you want. Make sure your estate planning documents reflect your wishes (executor, trustees, guardian of minor children, timing of distributions, etc.).
We all have a financial to-do list. It’s a relief to cross those tasks off the list and feel better informed and in control of our finances. 2016 could be a good year to take control. We’re here to help if needed.
Cindi Turoski is a managing member of Bonadio Wealth Advisors based out of our Albany, NY office.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.