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Conducting a Year-End Review of Your Finances


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By Todd Wilhoit, CRPC

The new year is quickly approaching. Be wise and make it a priority to review your savings and retirement plans before the current year ends. It’ll be worth the time and effort and a great way to feel in command of your financial forecast. No matter where you are in planning and saving for retirement, financial maintenance is a profitable undertaking. It’s important to review your savings and investments throughout the year, but there are benefits to allocating special attention to finances at the close of the year.

Reflect on the Your Finances for the Past Year

Reflect on your activities from this year. Did you meet your financial goals? Did you stay within your budget? Did you pay off the debt you set to reduce? These questions and more need to be addressed and thought through carefully. Find the issues that need refining and pledge to make adjustments now and throughout the upcoming year.

Review Your Investments

Examining your financial portfolio is a smart move to make as the year draws to a close. Keep your long-term goals in mind as you decide whether your current allocations are in line with objectives outlined for your retirement and personal savings targets. It's natural to have anxiety as you make these changes, but this annual checkup is necessary as you spot areas needing modifications.  

As you evaluate your investments, have these three questions in mind:

  1. Are there family or career changes that could effect the status of your finances?
  2. Do you predict any major purchases during the upcoming year?
  3. Have you looked over market changes from last year and review what’s forecasted for the next year?

All of these questions are important to consider as you approach the new year, and it’s an ideal time to ensure your combination of assets are matched to your short and long-term goals. (For more from this author, see: What Is the Financial Planning Process?)

Capitalize on Retirement Contributions

Most full-time employees have access to a retirement plan called a 401(k). This company-sponsored savings option allows people to invest a portion of their income before it’s taxed. If you’re able, contribute the maximum amount to your 401(k) account. Many employers will equal your contribution, so take advantage of this free money. Each company is different in how you qualify for their matching contribution. Contact your human resources department to find out these requirements.

Most retirement plans offer advantages during tax time. Tax laws dictate that the maximum you can contribute to a 401(k), 403(b) each year. If you have contributed less than the limit, consider boosting your deposits by December 31. This move offers more than one benefit. You’ll lower your taxable income for last year while also upgrading your retirement plan. Until money is withdrawn, you won’t pay taxes on your contributions or your earnings. (For related reading, see: Maxing Out Your 401(k) Is Profitable: Here' s Why.)

The contribution limits are the same if you contribute to a Roth 401(k) instead. While your contributions to the Roth 401(k) are made after income is taxed, Distributions may be subject to taxes if certain requirements or exceptions are not met. Please consult with your advisor.

Pay Off Outstanding Debt

Saving is paramount in preparing for retirement, but it’s equally important to work toward becoming debt-free. Even though the holidays are approaching us, it’s a great time to evaluate your debt. Through this process, you’ll be encouraged to grab for your wallet less and less. Credit card debt creates huge financial holes; a pit that can quickly damage your family’s fiscal foundation.

Just as your savings accrues interest, your debt accumulates interest in the same way. Unfortunately, interest charges for debt are much greater than the interest you receive on your savings. If the interest you’re forking out each month is sizable, take the time to research other options until you find a loan that best fits your means and your needs.

As you commit to diminishing your debt, devise a plan and make it happen. Choose a practical strategy you can live with. Depending on your scenario, this might require allotting less attention to savings and a greater focus to downsizing your debt. It might not seem ideal at first, but it’s an approach that’ll move you forward as you aim to rid yourself of debt and steadily build your fortune. (For related reading, see: Saving vs. Paying off Debt.)

Offset Your Investment Losses

Losses sustained from stocks, bonds, mutual funds and exchange-traded funds (ETFs) can be used to counter gains credited from other investments. This concept is called tax-loss harvesting. In simple terms, you offset your capital gains through losses incurred from selling stocks, bonds and other funds that have dropped in value. Through this practice, you can lessen the taxes you pay on the wealth made from profitable investments. 

If you do not have capital gains from this year, you may use investment losses to offset up to $3,000 in regular yearly income. If you have more than $3,000 in losses during a calendar year, you are allowed to carry them forward for use in future years.

Set Aside Emergency Funds

An emergency fund is necessary for reserve and peace of mind for you and your family. Most financial experts will tell you to aim for saving enough cash to cover expenses for three to six months. Sometimes this may not be enough. If possible, consider increasing the amount to nine to 12 months.

Keep emergency money in an account you can access quickly and easily. You want money available so you can promptly replace a defective appliance or non-working vehicle. Consider a checking or money market account you can tap into through an ATM or by writing a check.

Use the Funds in Your Flexible Spending Account

Through a flexible spending account (FSA), you contribute money into a tax-free account used to pay healthcare costs not covered by medical insurance. It’s important to remember there is a deadline in requesting these funds. Check with your benefits department to find out the cutoff date for accessing the money in your account. If contributions are not accessed in time, those funds are forfeited. (For related reading, see: How Flexible Spending Accounts Work.)

Make a Charitable Donation

Charitable donations offer a great opportunity to help others while also reducing your tax bill. Whether you donate money or non-cash items, keep a record of all that you contribute. The end of the year is the perfect time to review your donations and see what charitable deductions you qualify for. Keeping track of your contributions is especially important if you itemize on your taxes. These donations can result in a noticeable difference in your tax return.

If you donate items valued over $250, you must keep a receipt that offers details of the transaction. Donations you wish to include for the current year's returns must be completed no later than December 31.

As you map out your charitable giving, be aware of the adjusted gross income (AGI) limitations that apply to your charitable deductions. With the possibility of fewer benefits in the coming years, it may be wise to increase your charitable giving. If you have cash available, consider contributing a portion of what you plan to donate.

While the last two months in the calendar year are likely the busiest, it is vital you use this time to complete a thorough financial checkup. Make moves now that will enlarge your tax return while preparing you to thrive in the new year. 

(For more from this author, see: Why You Should Start Financial Planning Early)

This article was originally published on Investopedia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.





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