A year end financial review is a great way to take stock of your money goals each year, see what worked, what didn’t, and make adjustments for the new year.
It’s really no different from an annual checkup at the doctor (with less poking and prodding). You want to make sure everything is in working order. In case it’s not, you can catch and fix any problems early before it gets worse. Then you can relax knowing you won’t be back for another year.
Well, your finances need a similar annual checkup to measure your progress, keep you and your family protected, and moving forward toward your goals. Otherwise, one day you’ll check in on your progress only to find you’ve fallen a decade behind.
That’s because life rarely follows a straight line. Things change. Goals, dreams, family, you name it, and your money needs to be updated along the way.
Your financial review can easily be done on your own, and quickly (if you already have a plan in place), in just a few hours. That is, as long as you stay focused on what matters – the areas you can control.
Financial Review Checklist
Your financial review will go over everything that has financial importance to you. It starts with your budget, financial goals, investments, insurance, taxes, and any legal stuff you have set up for your money.
A budget is the easiest way to track money for your goals, needs, and wants. By tracking how much money is going in and coming out each month, you get a very clear picture of what you’re financial capable of doing each year.
Tackling your yearly budget involves two simple steps:
- Review your budget for the past year
- Use it to build a budget for next year
The easiest way to do this is with budgeting software that lets you break everything into groups like groceries, gas, mortgage payments, credit card, vacation, taxes, and more. From there, you can print out a report comparing what you budgeted for each group versus what you spent. You’ll know exactly where you went over or under budget for the year. Then, you can make improvements toward building your budget for next year.
While you’re at it, keep on an eye on areas where you can unlock a little extra money to put toward savings.
Did you stick to your savings goals for the year? If you stumbled, why? Is there room for improvement? Did anything change that would let you save more? These are a few questions you can ask after going over your budget.
The reality is, your ability to save will largely determine the success of your financial goals. This is especially true with those bigger goals like saving for college or retirement.
But first, it’s good to have an automated savings plan in place every year. These days bank accounts, brokerage accounts, and retirement accounts can all be set up to automagically deposit money on a specific day each month. If you don’t already do this, take advantage of it. It helps to cut down on missed savings goals.
A good goal for any new year is to boost your savings by 1% of your income. Do this annually and it will quickly compound your success rate and your money. If you’re not sure where to start, here are a number of ways to save more money.
If you don’t have a retirement plan in place, your financial review is the perfect time to get started. Just follow the steps in this retirement planning guide. But if you do have a plan, now is the time to review everything, check your progress, and make adjustments.
There are three main areas to focus on:
- Make sure you saved enough for this year
- Make adjustments so you save more next year
- Take a minimum distribution if you’re 70½ or older
The great thing about a year end financial review is you still have time to fix anything you missed. This is especially helpful when it comes to your retirement accounts. If you haven’t maxed out your 401k or IRA for the year, now is the time to plan for it. Your 401k deadline is December 31 and should take priority. The IRA deadline is later.
Now is the time to make any necessary changes for next year. With your budget plan for the new year in hand, you can contact the HR department to increase your 401k savings at work. You can start an IRA or adjust any monthly IRA deposits you’re already making.
For those already enjoying retirement and meet the 70½ age limit, don’t forget about taking the required minimum distribution from your IRA and other retirement accounts this year. It’s a 50% penalty if you forget.
Once you have your savings and retirement on track, it’s time to do an investment review. Make sure you focus on the things you can control. Sure, checking your performance for the year is a fun exercise. The key to an investment review is to make sure your portfolio will perform great in the future.
Say you have an S&P 500 fund in your portfolio. You can’t control how it performs from year to year, but you can control which S&P 500 fund you choose, the fees you pay, and how much of your money is invested in the fund.
You can use a simple portfolio checklist to make this review easier. Here are a few things to look out for:
- Do your investments still align with your goals?
- Did the fund’s performance live up to its benchmark?
- Is there a lower cost fund available that invests the same way?
- Are there other excessive fees you can avoid?
- Does your portfolio’s asset allocation need rebalancing?
- Does your 401k offer new investment options that better fit your portfolio needs?
This can get a little tricky with taxable accounts and the capital gains tax. A simple rebalancing can trigger capital gains. When you do sell something, know your investment’s cost basis, take advantage of capital loss harvesting, and avoid the wash sale rule in the process. The more prepared you are beforehand, the easier it will be to keep your tax hit to a minimum.
Capital gains tax is just the start. Little things, like maxing out your retirement account can help lower your taxable income. Charitable donations is another (if you itemize your deductions).
The tax code includes many other credits and deductions for major life changes too. Things like marriage, a new child, or a new home all offer tax saving opportunities.
Even if nothing changed for you in the past year, just having the paperwork in order helps. You can use this tax checklist to get started.
Insurance is one of those necessary evils we all must deal with. Whether it’s life, health, disability, auto, or home insurance, we only need it when something goes wrong. That’s why your insurance needs to be reviewed each year. Because, in case the worst does happen, you want to be completely protected.
Life insurance should be updated to cover any family or income changes. The same goes for health and disability insurance.
And while you’re at it, you might consider a health savings account (HSA). Anyone with a high deductible health plan can open an HSA to help cover future medical costs. The bonus is any money you put into an HSA is tax deductible, investable, grows tax-free, and can be withdrawn tax-free for qualifying medical expenses. And after age 65, the money can be can withdraw for any purpose penalty free but taxed just like your traditional retirement account.
And don’t forget about your property. People can rack up a lot of stuff in one year. A quick inventory of your home might show some new items (and old items) need added coverage from your homeowners insurance. Especially anything valuable. Your valuables may be priceless to you but it’s replacement value will change. Take gold jewelry for example. The price of gold is different today than it was ten years. Are you covered for that difference in price?
While you’re at, why not shop around for lower rates too.
Estate planning is not limited to the super wealthy. Legal documents like wills and trusts, all fall under your estate and need to be reviewed regularly. That includes updating beneficiary forms on everything – retirement accounts, life insurance, annuities, 529 plans, and even savings and brokerage accounts.
You probably won’t need to make changes every year. Still, it’s worth going over just in case. You don’t want the wrong person getting your money.
If any of the strategies above seem complicated or confusing, or maybe you want someone to walk you through the process, then consider a financial advisor. A quality advisor will tailor a strategy specifically to your needs today and the many years ahead.