The start of a new year is a great time to look at your finances, see where you stand, and do what you can to prepare for what’s next in your life. While you don’t need to do everything all at once, you can get yourself on the right track with a few simple tasks that will help you get your financial house in order:
If you don’t have a budget, now is the time to create one. It’s difficult to know what to do with your money or how to achieve your goals if you aren’t even tracking your cash flow. A simple breakdown of your earned income, ongoing committed expenses, and discretionary spending can be truly eye-opening. Everyone has a system that works best for them but in the end, knowing your full financial picture is empowering. If you are looking for more budgeting tips, please read our past post “Back to Basics: The W’s of Budgeting”.
Whether you need a whole new approach, or whether you just need to tweak your current budget, now is the perfect time to make sure your money is accomplishing what you want it to by reviewing your situation. Figure out whether changes to your income should result in increased retirement contributions, and determine which spending categories you might be going over in, and look for ways to bring them in line.
Emergency Savings Plan
Do you know what you would do if faced with a financial emergency? Take some time to work out an emergency savings plan. If you don’t have one already, establish an emergency fund by opening a savings account for the purpose. Then, figure out how much you can contribute each month to build the balance. Finally, look at your spending, and decide which items you could cut from the budget immediately in the event of a financial emergency. Knowing what to do is essential if you want to remain calm and keep your finances from total collapse.
Review your insurance coverage. Insurance is essential if you want to ensure that your assets are protected. Has your home appreciated in value recently? If so, you might need to update your coverage. If you or your spouse has seen a signficant increase in income, more life insurance might be necessary. From auto coverage to health coverage, make sure that you have all the insurance coverage you need to ensure that you aren’t devastated by an unexpected event.
Tax Withholding Adjustments
Look at your taxes for the last year. Did you have a large refund, or do you owe more than $1,000? In either case, it might be a sign that you need to adjust your tax withholding. If you have a big refund, you are withholding too much, giving the government an interest-free loan when you could be using that money to your advantage all year. If you owe more than $1,000, you probably aren’t withholding enough, and you could see a strain in your finances as you try to come up with the money. Increase your withholding to spread the pain out over the year, making it more manageable. And don’t forget about state taxes!
HSA and FSA Adjustments
Consider your out of pocket health care spending for the past year. In some cases, you might need to change the way you set money aside. With the HSA, you probably don’t need to make many adjustments, since the money rolls over year to year. In fact, you might want to increase your contribution, since you get a tax deduction and the money grows tax-free over time as long as you use it for qualified health costs.
With the FSA, you might need to make changes in your habits. If you were scrambling to use all the money in your account (since it all doesn’t roll over), that’s an indication that you might need to reduce what you put into the account.
If you want more detailed information about HSA and FSA accounts please read our previous post, “Navigate Open Enrollment and Healthcare Options.”
Do you have a will? Now is the time to create one or make necessary changes to your existing one. Now is also a good time to review beneficiary information, and change it as needed. Remember: beneficiaries listed on life insurance policies and retirement accounts are preferred over what’s in your will. Make sure it all matches up.
Finally, look ahead to the coming year. Will you have major expenses? Whether you expect to have a baby, make home improvements, buy a new car, or have a surgery, now is the time to prepare. Consider a savings plan to make the cost more manageable, and find out what needs to be done in terms of insurance, applying for loans, and other paperwork.
Nothing replaces good planning when it comes to your finances. Take a couple of hours now to consider the situation, and get your financial house in order.
By Miranda Marquit, Staff Writer