As the end of the year approaches, many people begin to reflect on their achievements and plan for the future. One crucial aspect of this reflection should be a comprehensive financial checkup. Financial advisers suggest conducting an annual review of your financial situation to ensure you’re on track to meet your goals and make any necessary adjustments. This process involves evaluating your life changes, reviewing expenses, updating beneficiary information, consolidating debts, adjusting investments, considering charitable contributions, reassessing insurance coverage, managing cash reserves, contributing to retirement savings, and withdrawing required retirement distributions.
1. Evaluate Life Changes
The first step in your annual financial checkup is to assess any significant changes in your life that could impact your financial situation. Whether you’ve experienced a major life event such as marriage, divorce, the birth of a child, or the sale of a significant asset, these changes can affect your income and spending habits. Planning for these events in advance can help you avoid financial pitfalls and make the most of your resources. Financial planner Roya Moltaji emphasizes the importance of planning for major expenses, suggesting that you plan out big-ticket items over the next five to ten years to ensure your money is in the right places for tax purposes.
For individuals like Debi Espe, a retired flight attendant, annual financial reviews became a necessity after the passing of her husband. The regular checkups allowed her to be proactive rather than reactive, ensuring that her financial decisions were well-informed and intentional. Evaluating life changes is fundamental to ensuring your financial plan aligns with your current and future needs.
2. Review Expenses
Understanding your expenses is crucial to maintaining financial health. Reviewing your expenses annually allows you to identify areas where you might be overspending and make adjustments accordingly. Common areas to review include subscriptions or memberships that you no longer use. Over time, expenses can rise due to inflation and lifestyle changes, so it’s essential to keep this in check to ensure you are not spending beyond your means.
Chief financial analyst Greg McBride advises that regularly auditing your expenses helps you stay aware of where your money is going and can identify opportunities to save. Simple steps such as canceling unused subscriptions or negotiating better rates on services can result in significant savings. By staying on top of your expenses, you can ensure that you’re allocating your money where it will be most beneficial.
3. Update Beneficiary Information
Another vital task in your annual financial checkup is updating your beneficiary information. Life events such as marriages, divorces, or deaths can necessitate changes to your beneficiaries. Ensuring that your beneficiary designations are current on all accounts, including retirement accounts, insurance policies, and estate planning documents, can prevent potential legal complications and ensure that your assets are distributed according to your wishes.
Financial experts recommend that you periodically review and update beneficiary designations to match current circumstances. This practice not only aligns your estate plan but also provides peace of mind knowing that your loved ones will be taken care of according to your intentions. Additionally, consistently updating this information ensures there are no discrepancies between different accounts, which could otherwise cause significant issues.
4. Consolidate Debts
High-interest debts, such as credit card balances, can significantly impact your financial health. Consolidating debts can help you manage your payments more efficiently and potentially reduce the amount of interest you’re paying. With the average credit card interest rate hovering around 21% to 23%, it’s critical to evaluate whether it makes sense to carry those balances or pay them off.
Ravie Singh, branch manager for U.S. Bank, suggests that if you have multiple credit cards with high-interest rates, consolidating them into a single lower-interest-rate loan can make a significant difference. This approach not only simplifies your debt management but also can save money on interest, allowing you to channel those savings into other financial goals or investments.
5. Adjust and Rebalance Investments
Regularly reviewing and adjusting your investment portfolio is necessary to ensure it aligns with your financial goals and risk tolerance. The stock market and economic conditions can cause fluctuations in your portfolio’s performance, necessitating periodic reallocation or rebalancing of assets. Reallocation involves changing the percentage of invested assets depending on your risk tolerance or timeline, while rebalancing entails selling or buying assets to maintain the same percentage range within your portfolio.
Financial planner Roya Moltaji compares this process to realigning the tires of your car; it’s about ensuring that all components work harmoniously. In a volatile market, some investments may outperform or underperform, requiring adjustments to maintain the desired allocation. By dedicating time to this task annually, you can keep your investments on track with your long-term goals and mitigate potential risks.
6. Consider Charitable Contributions
Charitable giving is not only a fulfilling way to support causes you care about but also a strategic tool for managing tax liabilities. Financial adviser Jackie Larson highlights how charitable donations can reduce your taxable estate, particularly as the estate tax exemption is expected to decrease. By making annual gifts, individuals can donate up to a specified amount without incurring taxes, thus potentially lowering their estate’s future tax burden.
For retirees like Colleen Breen, reviewing charitable contributions during year-end financial checkups helps align their giving with their current financial situation. Direct donations from retirement accounts can also provide tax advantages and meet required minimum distribution obligations. Considering charitable contributions as part of your financial plan can optimize tax benefits and fulfill personal philanthropic goals.
7. Reassess Insurance Coverage
Insurance needs can change significantly over time, making it essential to reassess your coverage regularly. One of the most critical areas to consider is long-term care insurance, which can significantly impact financial stability in later years. Financial adviser Joe Stepanek emphasizes the importance of considering long-term care insurance while you are still young and healthy enough to qualify. Early coverage can be more affordable and ensure you have the necessary support should you require long-term care.
Beyond long-term care insurance, it is also prudent to review your life insurance coverage periodically to ensure it meets your current needs. Property and casualty insurance should cover all your assets appropriately, protecting you from potential losses. Regularly updating and adjusting your insurance policies can provide peace of mind that you and your loved ones are adequately protected.
8. Manage Cash Reserves
A critical component of financial planning is managing cash reserves to balance liquidity with investment returns. For retirees or those nearing retirement, determining the right amount of cash to have on hand for emergencies without letting too much sit idle is essential. High-yield savings accounts and certificates of deposit (CDs) can provide a safe place for cash while earning interest that outpaces inflation.
Given that interest rates can fluctuate, it’s wise to periodically evaluate your cash holdings to ensure you’re getting the best returns possible. Locking in investment income at fixed rates through CDs or high-quality bonds can offer predictable income and stable returns. Financial adviser Greg McBride advises retirees to consider these options to optimize their cash reserves and maintain financial security throughout retirement.
9. Contribute to Retirement Savings
Building a robust retirement savings plan is vital for financial health and security in your later years. Contributing to employer-sponsored retirement accounts, such as 401(k)s, and individual retirement accounts (IRAs) should be a priority. Making the maximum contributions to these accounts can significantly benefit your future financial situation, especially if your employer offers matching contributions, which effectively amount to free money.
For individuals over 50, taking advantage of catch-up contributions can further bolster retirement savings. Ensuring that contributions are made before the end-of-year deadline for 401(k) accounts and by the tax filing deadline for IRA accounts is crucial. By prioritizing these contributions, you set yourself up for a more comfortable and financially secure retirement, helping you achieve your long-term financial goals.
10. Take Required Retirement Distributions
As the year comes to a close, many individuals take time to reflect on what they’ve accomplished and start planning for the future. A critical element of this reflection is conducting a thorough financial checkup. Financial advisors recommend performing an annual review of your financial status to ensure you’re progressing towards your objectives and to make any necessary changes.
This annual financial assessment should include examining any significant life changes that have occurred, scrutinizing your expenses, and ensuring that beneficiary information is current. It’s also wise to evaluate outstanding debts with the possibility of consolidating them and to review your investment portfolio to determine if adjustments are needed.
Additionally, consider any charitable contributions you plan to make, reevaluate your insurance policies to confirm they’re still appropriate, and manage your cash reserves efficiently. Don’t forget to contribute to retirement savings and ensure you’re compliant with mandatory retirement distributions if applicable. By carrying out these steps, you will be better positioned to achieve your financial goals and make informed decisions for the upcoming year.
