A resolution for every month to help you gain financial independence
Cleaning up personal finances remains one of the top resolutions every New Year. But we all know what happens to most such self-promises, so here’s a month-by-month to-do list to cultivate better financial health.
January: Organize paperwork- this point eludes many. Are your financial documents organized in paper, or virtually, so information is at your fingertips? Your heirs will be eternally thankful if you unexpectedly die or are incapacitated.
February: Consolidate investments. Trim your number of accounts and consider consolidating all your dormant 401(k)s into individual retirement accounts. Spreading your assets across various brokerage accounts is not smart diversification – it’s a recipe for confusion.
March: Follow the money. If you’re still working and living a hectic life, you may have a poor sense of your personal cash flow, the amount of monthly income and expenses. You don't have a solid financial plan if you don't know how much is coming in and where it's going.
April: Tax smarts. Did you fund an IRA or Roth IRA for you and your spouse, contribute the maximum to your employer retirement plan and contribute to a Health Savings Account if you have a high deductible and HSA qualified health plan?
May: Investment smarts. How much do your investments cost you? Do you know what your insurance agent, 401(k) plan or financial advisor charges? How about the underlying expenses that you pay to buy mutual funds or exchange-traded funds?
Are your investments allocated wisely to minimize taxes? For example, do you hold real estate investment trusts in your tax-deferred account? Municipal bonds in your taxable account? How much risk are you taking with your portfolio?
June: What are you worth and why it matters. You can calculate your net worth (all your assets, such as your home and retirement funds, minus all your liabilities, such as your mortgage and credit card debt) many ways. A sophisticated net-worth calculation projects factors of asset growth such as rates of investments’ returns and risk and your rate of saving and liabilities to the end of your life.
Your goal: Minimize the risk of outliving your assets.
July: Insure against risk. Insurance keeps you financially whole if disaster strikes. Do you have a Personal Liability Umbrella Policy (PLUP) that will help protect your assets?
Have you considered long-term care insurance? This coverage helps with costs of basic daily needs over an extended time. Do you understand your policies – When was the last time that you reviewed what you have?
August: Retirement planning. Planning should begin in your 20s and doesn't end when you retire. Would you rather know that you're short of your retirement goals today – when you have time, or the day you retire?
Are you aware how to optimize your Social Security benefits? If retired, are you withdrawing from your accounts in an optimal method to mitigate taxes?
September: Gift wisely. You can give back in many ways to organizations and people you care about with donations of appreciated securities, or with payments for college, and new mortgages. The Internal Revenue Service offers several guidelines on gifting.
October: Preparing for the inevitable. Engage an estate attorney. Your state of residency distributes your assets with no input from you if you die without a will.
If your estate documents are older than about seven years, refresh them. Everyone needs estate documents such as wills, living wills, medical health-care directives and powers of attorney to stipulate your wishes if you are unable to decide matters yourself.
You'll especially need these papers if you or your spouse, or both, are uncomfortable with financial matters and your children are younger than legal age.
Also, re-examine your documents if:
You’re in a second marriage
You own property in or reside in more than one state
You’re concerned about privacy
You own a business or
A family member has a special-needs.
November and December: Reality check. Did you track your losses on your taxable accounts, such as individual and joint investment accounts, bank accounts and money market mutual funds, to name a few? These moves can qualify you for tax credits.
If you followed these steps, you’re in the minority of individuals with the tenacity to tackle financial planning.
But you should still engage a professional advisor to check your assumptions. Be realistic about what you can accomplish on your own.
It’s important to get your finances right - and keep them on track all year.
