Practicing good personal finance is about setting and achieving your goals. If you laid out plans for what you want to accomplish with your money in this year, now is a great time to take stock of your financial life, says Will Johnson, a financial advisor at Great Waters Financial in Vadnais Heights, Minnesota.
"People often have lofty goals or New Year's resolutions, whether it's saving a certain amount in a retirement plan or for a short-term goal like a new car or a home project," he says. "But people are terrible about checking how they're doing. They get to the end of the year and say, 'Oh, shoot, I missed that by a mile.'"
Take some time this month to give yourself a financial checkup. If you award yourself a clean bill of health, great. If not, you have plenty of time to get yourself back into shape by the end of the year.
You may have established some new spending habits during the pandemic, trading your gym membership, concert tickets, and weekend getaways for takeout food, streaming services, and online shopping. That may not have hurt your budget when large swaths of the economy were closed, but now that things are getting back to normal, adding your old habits on top of the new ones could mean that you're overspending.
"Now is a good time to take an honest look at what you're actually spending," says Johnson. "You can set all sorts of financial goals with money you want to save, but that's next to impossible if you don't know what you're working with."
Johnson recommends looking at your total cash outflow over the last 12 months of bank statements. Divide that amount by 12 to arrive at an average monthly expenditure, evening out slow months with ones when you tend to spend more, like around the holidays. Then compare it to what you're bringing in each month, and what you hope to put towards goals like retirement savings or a renovation fund.
If you find that you won't have enough left over at the end of each month to stash away, it may be time to examine ways to slash your spending or up your income.
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The pandemic forced millions of people to switch up their financial priorities, which in many cases involved halting retirement savings, taking on debt, or spending down emergency savings. If you've established a stable source of income, it's likely time to get the rest of your financial picture back on track, says Chad Parks, founder and CEO of Ubiquity Retirement + Savings in San Francisco, California.
"Ask yourself if you made any changes last year to what you normally do," he says. "Are you spending more? Did you make adjustments to your retirement savings? Are you keeping enough cash on hand?"
If you accrued high-interest-rate debt, such as credit card debt, over the past year, paying that down is a top priority. "If paying debt is costing you more than you'd make from your investments, you're going backwards," Parks says. "If you hold debt at a rate of more than 6% to 8%, primarily focus on paying down that debt."
That doesn't mean you need to sink every spare penny into your credit account. "Commit to paying a certain amount a month toward that debt. Out of your leftover money, maybe half goes toward the debt," he says. "The rest you can use to build an emergency fund if you don't have one, or put into retirement savings."
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If you have a low-cost, broadly diversified investment portfolio, you may have been tempted to let things run without your supervision over the past year. After all, with the S&P 500 having returned 38% over the past 12 months, what could you possibly have had to worry about?
Therein lies the problem, says Brian Kennedy, a wealth planning advisor at KCA Wealth in Camp Hill, Pennsylvania. "The market is the highest it's ever been," he says. "Are you really evaluating your risk? Is the amount of risk you're taking in your portfolio appropriate?"
After such impressive gains in the stock market, your asset allocation could have shifted into riskier territory, Kennedy says. Letting more and more money accumulate in stocks means that your portfolio will suffer greater losses when the market eventually hits another downturn.
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"If you were set up with 70% stocks and 30% bonds, you could now be at 85/15," he says. "If you haven't looked at it, you could be taking on more risk than you're intending to."
To determine an asset mix that aligns with your tolerance for risk, try taking a short questionnaire offered by brokerages, such as this one from Vanguard. And if you already have an asset mix in mind that lines up with your appetite for risk, now is a good time to rebalance your portfolio to your preferred breakdown.
Checking in on your tax situation now can help you avoid surprises next year, says Parks. "It's always good practice to look at your withholding," he says. "Go into one of the tools provided by the IRS or your payroll provider, and make sure you're not on track to withhold too much or too little."
Such tools check your current withholding and apply factors such as your income and your eligibility for various credits and deductions to estimate what you might owe come tax time. Any drastic life changes, such as the birth of a child, a marriage, or a substantial raise at your job, are especially great reasons to give yourself a tax checkup.
If you're on track to owe a big bill, start having your employer withhold more from each check so you don't owe a huge payment next April. If you're owed a big refund, you should likely withhold less, says Parks. "If you overpay, you've basically given an interest-free loan to the government."
Video by Stephen Parkhurst
If you're out partying this summer, the last thing you probably want to think about is insurance. That's sort of the thing about insurance: You never need it until you do. But when you do eventually, you want to make sure that you're adequately covered. And that's something you can do now.
"The biggest detriment to people that I see in financial planning comes down to one word: procrastination," says Kennedy. "I tell clients they should be thinking about disability insurance, and they tell me open enrollment isn't until January. But if you don't think about it now, January rolls around, and you don't elect it again."
So think about your coverage now. Life and disability insurance policies will cover your family expenses in the case that you die or are no longer able to work. Take a look at your total household budget and debt, along with the coverage your current policy provides, says Johnson. "Think, 'Does this policy cover enough for my family to live off of, debt-free, and cover all the things they need?'"
Even if you're happy with the policies you have — including auto and homeowners policies — it never hurts to shop around for a better deal. "It's a competitive landscape," Parks says. "Just because you've been using a certain insurer forever doesn't mean that they're offering you the best rate."
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