The end of the year is a great time to reflect. While this holiday season may be different, with more Zoom calls and less in-person gathering, many traditions will continue to be honored, and perhaps new traditions will be established. With time off around the holidays everyone can benefit from spending a couple hours to make sure finances are in order for the year to come.
Take a Financial Snapshot:
Add up your fixed expenses and compare it to your income. How much money do you have left over for your discretionary spending? Use this spreadsheet to help: Personal Financial Statement Spreadsheet. If your income is not double your fixed expenses, not including your monthly savings, you may want to look at ways to increase your free cash flow. If your income is less than double your fixed expense you may not have flexibility in your budget for unexpected expenses or you may not be saving enough for retirement.
Now compare your fixed expenses to your savings account. How many months of these expenses can you cover? Holding 6 months’ worth of expenses in savings is a good rule of thumb. If you are more concerned about your job security or the amount of time it may take to find a job you may want to hold more. Building an emergency reserve is more important than investing.
Write down all your assets and add them together. Do the same for your liabilities. An important step in building and managing your wealth is knowing where you stand year-over-year. Seeing the progress you have made over the course of the year can give you reason to celebrate.
Contributions and Distributions:
Maximize contributions to tax efficient tax accounts. In 2020, individuals who participate in a 401k or 403b can contribute $19,500 and an additional $6,500 if age 50 or older. Individuals who utilize Roth or Traditional IRAs can contribute $6,000 and an additional $1,000 if age 50 or older. You have until Tax Day to contribute to an individual IRA.
The holiday season is a popular time for giving. If you are charitably inclined there are some unique tax considerations for 2020. Individuals who take the standard deduction can deduct $300 from their income (top line deductions). Individuals who itemize can deduct charitable gifts up to 100% of AGI, adjusted gross income, from their taxes.
Reevaluating your investment portfolio:
Rebalancing your investment accounts has been a reliable method for building sustainable wealth. Markets have a tendency to operate in cycles, so selling assets that have performed
well and buying assets that have underperformed fits the investment mantra of sell high, buy low. As long as you have confidence in the underlying investment, this investment process should continue to help individuals achieve financial success.
If you have incurred losses in taxable accounts, you may want to consider selling those holdings to offset realized gains and potentially $3,000 of ordinary income. Learn more about the benefits of tax-loss harvesting to lower your tax bill. It is best to contact a tax professional before making tax related decisions.
Review estate plans:
Wills and powers of attorney (both financial and healthcare) are documents everyone should have in place. Adding beneficiaries to accounts is an important step to ensure the money intended for those beneficiaries avoids probate. Consulting with an estate planning attorney is the best way to ensure your assets are properly titled and beneficiary designations are in place.
Take some time to review the above areas of focus. Once you determine the areas that are most important to your financial health you must turn those ideas into goals. Make sure they are realistic and achievable. If you have additional questions or want help developing action items to reach your goals contact a financial advisor to get their thoughts on what can be most impactful to your situation.