There are several times of the year that make you think of projects. January is for setting resolutions. Spring is for cleaning. Summer is for house projects. Fall is back to school, and then it’s the holidays. In addition to these, make tax time also a time that you set aside to remember to sit down and do a financial check-in. You are already in the process of looking over your income documents, how much you paid out for your mortgage and student loan interest, how much you paid out in child care costs, etc. Why not use this opportunity to take stock of your whole financial picture?
Here’s how to do a financial check-in during tax time:
Check on your bank accounts
What balances do you keep in your bank accounts? What are your interest rates? Do you have enough liquid savings available to cover an emergency, but not too much to lose out on earning more interest from a money market account, certificate of deposit, or investing in the market? If you are paying a monthly fee, find out how to have it waived like signing up for direct deposit, making sure you keep the minimum balance in your account, or just get yourself a different account without a fee. If you have an abysmal interest rate for your savings account, shop around to see if you can get a better one. You may even find that an online bank will have the best rate for a high-yield savings account, so make sure to check them out in addition to brick and mortar banks.
Are you maxing out your 401k?
Look over your annual contributions to your 401k retirement account through your company. Are you on track to max out those contributions? The best way to do that is to contribute up to the maximum for matching funds from your employer. If they will match everything you contribute, be sure to contribute the maximum annual contribution amount ($19,500 for 2020) or as much as you can afford to contribute. Not contributing enough just leaves those matching funds on the table. Look over your paystub or check with your HR department to see what percentage of your income you are contributing and what that equals in dollars, as it may have changed over time if your income changed. Then see if you can afford to up that rate, even just a little bit. And as you get promotions and raises, be sure to also raise your contribution amount closer to the annual maximum contribution.
Should you contribute to a Roth IRA too?
If you already have an employer matching 401k retirement account, you may be wondering if you should also contribute to a Roth IRA. The answer is yes, unless your income is too high to allow you to have a Roth IRA account ($139,000 individually or $206,000 for married couples). The ideal distribution of funds is to contribute to your 401k up to your employer’s match or the maximum annual contribution if your employer matches everything you contribute. Then you can sock away up to $6,000 annually in an IRA account which offers a wider variety of investment choices, is not tied to your employer, and can grow tax-free in a Roth IRA, unlike tax-deferred growth in a Traditional IRA or 401k account.
How much credit card debt do you have?
Quick, just throw out a number off the top of your head for how much you owe on your credit card right now. Do you think you are pretty accurate? If you don’t know how much credit card debt you have, you are in good company. According to US News & World Report, a full 21% of Americans don’t even know if they are in credit card debt, that is how pervasive debt denial can be. The way to confront this issue is to pull up those statements, check what purchases you have been floating on the card and what amount you are rolling over every month, and write that number down. Then, formulate a plan to pay that debt off quickly, as those credit card interest rates do unspeakable things to forgotten debts left to grow into monsters.
Can you save more each month and should you invest it?
Check out your monthly spending and review your budget. No need to go full-on depression-era bare bones here, but are you spending wisely? Do your spending habits align with your financial goals? If you find that you are throwing money out the window every month paying for an expensive gym membership you don’t really use or eating out many more times a month than you really get pleasure out of, it is time to trim the fat and sock some of that cash away for a rainy day. Next, ask yourself if you need this money in a liquid savings account or if you should invest it. If you have foreseeable expenses or upcoming financial insecurity or changes (a job change, pregnancy, a new house, a pandemic virus, anything that might make you need cash on hand), then the wise choice is to keep it liquid and easily accessible, even if it only earns a small amount in a savings or money market account. If you don’t need the money for the foreseeable future, go ahead and invest. Investing is about playing the long game so if you need the money in two to three years and the market drops, you are going to take a big hit. But if you leave it in you will have a chance to see your gains recover and your money continue to grow.
Check your insurance coverage
Though it is a pain to shop around for insurance regularly, it is a good idea to make an annual practice of it. Insurers know that their customers change companies frequently and they plan for it, hence why your annual premium may go up though your coverage does not. Long term customer loyalty is rarely rewarded anymore. Pull your auto and homeowners insurance policies and compare them to last year. Are you paying more for the same coverage? Do you need the coverage you currently have or do you need more or less? Reach out to your insurance agent and discuss this with them. They should be able to re-quote you for the same coverage and get you a lower premium, or modify your coverage to meet your needs and lower your costs. If you cannot get what you want with your current company, shop around and ask a broker to compare other companies. You may be surprised to find big savings hopping around to different companies every few years.
Is it time to refinance your mortgage?
When was the last time you looked closely at your mortgage billing statement? Do you know your interest rate on likely the largest loan you have? Tax time is the perfect time to check it over. Interest rates have been falling lately and now is a good time to refinance if it could benefit you. Even if a refinance is not in the cards for you, taking a look at what you still owe on the loan and noting how much you pay every month in interest and mortgage insurance (if you have it) might entice you to make some extra payments to the loan to get it paid off earlier than planned and save a chunk on interest.
Is your will up to date?
Do you know where your will is and is it up to date? Time to go find it, review it, and tell your family where it is and what it says. You may have major life changes that need to be reflected in your will (such as a new spouse or children, more assets to divide, new property, etc) so be sure to update it lest all your assets be left to your ex-spouse or your family is left bickering over property not included in the will that went to probate. Wills are also usually state-specific so if you moved to a different state you may need to have a new one drawn up or make changes to your existing one to meet the requirements of your new state.
Do you need to update your beneficiaries?
Along the same lines as updating your will, you should check your beneficiary forms for your 401k, IRA and Roth IRA, life insurance, and any other investment or financial accounts you possess. Perhaps you never filled out that beneficiary form when you opened the account and figured that it would just pass to your spouse anyway. Depending on your state, that may not be the case. Detailing the beneficiary of any account is always a better choice than leaving it up to the courts to decide. And if you have filled out your beneficiary forms, you may still need to update them to ensure that they are current. Again, a former spouse may still be listed and you would roll over in your grave before you would willingly give them your inheritance. Additionally, perhaps you have had additional children since you last updated the forms and you would want to include them. Or perhaps your adult children have married and changed their names and you need to update the forms again. There is usually no need to have an attorney or even a notary review these beneficiary changes and sometimes you can even make the changes through your online account with your brokerage.
Setting aside a time every year for a financial check-in is a useful tool to better understanding your finances and reaching your financial goals. Tax time is an ideal time to do this check-in as you are usually already thinking about your money and collecting annual statements from accounts anyway. You can do this check-in with your spouse or financial planner, or even just informally with yourself to keep yourself apprised of your financial picture. Keeping tabs on your money doesn’t have to be a complicated process, it just required a little attention to tracking the details.
