It’s the New Year and we all have our resolutions. Many of you plan on losing weight, getting into better shape and some of you plan on improving your financial situation. Financial planners are often asked, what is one thing I should focus on to improve my financial picture?
We have listed below not just one, but 7 simple things you can do this month and going forward to make a big impact on your financial future. If you do just one of them, you will have made progress. If you do all seven consistently, you are well on your way to a successful financial future. Many of our clients do this already, so this list isn’t just for you. It is a great list to share with members of your extended family and your friends. This topic can be boring but is very helpful and essential for improving your financial future.
- Set up your budget for the year.
The first step to developing better spending and savings habits is to create a budget that you can stick to and update it regularly. Start by making a list of all of your regular bills. For the ones that are the same every month, put down the exact dollar amount and for the others put down a range or an average for the last 12 months. Those are your starting budget numbers. Knowing how much you spend in an average month and year goes a long way to determining how much you can save. NerdWallet recommends following a 50/30/20 rule for budgeting which calls for spending about 50% of your after-tax dollars on necessities, no more than 30% on wants, and at least 20% on savings and debt repayment. For some people with lower income living in higher cost of living regions, this may be exceedingly difficult, but it is well worth the future financial stability.
- Review your retirement contributions
This one is obvious but very important. Everyone should push themselves every year to save more into their retirement plans at work. If you are saving less than 10% into your 401(k) (or other company plans), then increase your savings rate by at least 2% every year until you get there. If you are saving more than 10% then save an extra 1% per year until you hit the maximum contribution limit. That is $19,000 for 2021 ($25,000 if you will be 50 or older this year). If you are maxing out your plan at work, then consider an IRA and/or Roth IRA. If you are already doing that, then consider opening an individual brokerage account and save the extra 1% there. As we make more, we tend to spend more but if we also save more year after year, we can keep pace for retirement. According to the Washington Post, 71% of Americans aren’t saving enough for retirement. It is very important that you take advantage of the various available retirement savings vehicles.
- Review your emergency fund or start one for the first time. Now that you have reviewed your budget and determined how much you can reasonably save, it’s time to start your emergency fund. If you aren’t sure how much to save each month, take a portion of your income that you usually spend on non-essentials (clothes, restaurants, etc) and redirect that toward your emergency fund instead. In general, you should build up about 3 to 6 months’ worth of expenses in savings to cover an emergency. Growing your emergency fund will improve your ability to avoid unnecessary and expensive debt in the future.
- Check and review your beneficiaries.
Many people don’t realize that beneficiary designations trump your will. Your will may recently have been updated but it doesn’t mean anything unless you also update your beneficiaries. Double check the following accounts every year:
- 401(k), TSP, 403(b), 457 plan, IRA, Pension Plan
- Make sure you can go online and check that your beneficiary designations are current. If you can’t get the info online, then call your human resources department and have them send you a summary. Don’t forget to check the plans with your old employers.
- Life Insurance Policies
- Double check the primary and contingent beneficiaries on your individual policies by calling the company or your agent. Then call your human resources department or look online to confirm your beneficiary designation for your company life insurance.
- 401(k), TSP, 403(b), 457 plan, IRA, Pension Plan
- Review your current insurance coverage. It is also important to review your insurance coverage at least once a year. That includes life insurance, disability insurance, long-term care insurance, and property and casualty insurance. The amount of coverage you require changes over time depending on your income, the value of your assets including your home, car, and personal property, your employment status, your health status, and various other factors. A regular review of your coverage will ensure that you are not under- or over-insured.
- Review your Health Savings Account contributions or eligibility. You may be eligible to contribute to a Health Savings Account (HSA) if you are enrolled in a High Deductible Health Plan (HDHP) at some point in the contribution year. If you are healthy, generally have few medical expenses, and anticipate, you may want to consider signing up for an HDHP and an HSA. The benefit of this combination is that you can make contributions to the HSA that are pre-tax and come out tax-free if used for qualified medical expenses. The contributions can also be invested and have the potential to grow significantly if not spent in the near term. The contributions can also be used to offset long-term care premiums in the future. For 2021, individuals can contribute $3,500 to an HSA if they have a minimum deductible of $1,350 on their HDHP and families can contribute up to $7,000 with a minimum deductible of $2,700. There is also a catch-up contribution of $1,000 for individuals 55 and older.
- Organize your Key Financial Documents
Whether you do this in a file, binder or in digital format, makes little difference. What matters is that you get it done. Here is a partial list of documents:
- Most recent pay stubs
- Most recent Social Security statement or annual Social Security paycheck summary
- Pension pay statement or pension projection
- 401(k), IRA, and all other investment account statements
- Life insurance, long-term disability, and long-term care policy statements (don’t forget group plans)
- Homeowners, umbrella liability, auto, renters insurance documents
- Mortgage statements, including home equity lines
- Consumer debt (credit card statements, auto loans, student loans, etc)
- Estate planning documents
- Last year’s tax return
- People who know what they have and where it is are better off financially than those who aren’t as prepared. It’s also a great benefit for your family to have everything in one place in case something unexpected happens to you.
Best of luck “stepping up your finances” in the New Year!