Each start to the new year is a perfect opportunity for a financial check-up, allowing you to review what you have accomplished and what you can improve upon going forward. Below is a short list of considerations to get 2016 started off on the right foot:
- Update your budget – Creating and utilizing a budget can help establish spending patterns, reveal inefficiencies, track progress towards goals, uncover excess cash flow, and uncover opportunities for savings. Usually, budgets should not exceed more than a year and should be calculated on a monthly basis. When putting together the budget, make sure to keep it simple; if there is too much detail, you risk making it too difficult to implement and monitor.
- Reduce outstanding debt – After you have created your budget for the year, you may notice that there is excess cash flow that can either be saved and/or put toward outstanding debt (assuming there are no pre-payment penalties). If you have multiple liabilities, it usually makes sense to pay down high interest rate debt first.
- Increase your savings – As mentioned above, excess cash flow can also afford you the opportunity to increase your savings. If you have a retirement plan that has a company match, try to save the maximum amount necessary (if possible) to fully leverage your employers contributions. Remember, in 2016 you can contribute up to $18,000 to a 401(k)/403(b)/457 and $5,500 to an IRA, not including catch-up contributions for those aged 50 and older.
- Fund an emergency reserve – We typically recommend that you keep at least 3 6 months of expenses in liquid assets to handle unforeseen circumstances, such as a medical emergency, disability, or job loss. Not only can this account protect your ability to pay your bills, it can also help you avoid selling investable assets from your portfolio.
- Adjust your tax withholding – If you overpay your taxes, you are essentially giving the government an interest-free loan; if you underpay your taxes, you may owe a potential penalty. For these reasons, it is wise to estimate your taxes due ahead of time so that you can withhold the proper amount and potentially keep more of your paycheck each year.
- Review your current insurance coverage – Many different kinds of life changes can necessitate adjustments to insurance coverage. This includes, but is not limited to: health, life, disability, liability, and long-term care. That is why the beginning of each year is a good time to ensure that your current policies are adequate to meet your needs.
- Revisit your estate plan (and beneficiary designations) – It is wise to review your estate documents every few years to ensure they are as up-to-date as possible, both from a legislative and tax perspective, and also from a family perspective. If you do not already have documents, we recommend that you speak with an attorney about executing Wills, Durable Powers of Attorney, and Advance Healthcare Directives. In addition, you should review your beneficiary designations on insurance policies and retirement plans to make certain they align with your estate planning objectives.
- Check your credit score – Establishing good credit is important for debt management purposes, since it is integral to obtaining loans and securing favorable interest rates. For these reasons, it is imperative to constantly monitor your score and alert the proper bureau if there is any incorrect or fraudulent information in your report.
- Save your tax refund – Should you receive money back from the IRS during tax season, consider using it to fund an IRA, build your emergency reserve, and/or pay down a portion of outstanding debt.
Before making any major changes, you may wish to consider having a MASTERPLAN done first. This financial plan will take a comprehensive look at your financial situation and help you to not only implement some of these strategies but to also help you uncover other potential opportunities. Please contact Hefren-Tillotson for further details.