You get annual medical checkups and semi-annual dental checkups. Why not give your finances the same kind of “primary care”?
By performing an annual checkup, you can assess whether you’re following your budget and making the most of your investments. If you have veered off course, you can get back on track to meet your financial, career and life goals.
When should you give your finances a checkup?
The start of a new year is a perfect time for your annual checkup – you’ll get a head start on tax season, and you’ll have year-end pay stubs and account statements to work with. It’s also a good time to set goals for the year to come.
Of course, everyone’s situation is different – and yours may have changed drastically in the wake of the COVID-19 pandemic, but in general, here’s what your financial checkup should include:
Analyze income and expenses
Accounting software allows you to run profit and loss reports for easy income-expense evaluation. With a profit and loss report, you can see how much you spent on basic expenses like rent and utilities, as well as luxury items including restaurant meals and clothing splurges. Remember these “discretionary” expenses can easily throw your budget off track. Next look at your cash flow for the year to come. Do you expect any unusual expenses, such as a new car or that big vacation you couldn’t take due to the pandemic?
Revise your budget
Creating a budget is a great way to keep spending on track and meet your savings goals for the year. Seeing where your money goes can be an eye-opening experience. Compare your various expenses to your monthly income. If you find you have excess income, consider meeting with a financial advisor to determine the best way to put that extra money to work.
Review your retirement savings
Review your current retirement plan contributions. Are you saving enough? Can you save more? If you are at least age 50, take advantage of “catch-up” contributions. The IRS allow you to contribute up to $7,000 to traditional and Roth IRAs ($1,000 above the standard limit). You’ll have until April 15, 2022 to fund yours for 2021.
Make a debt-free plan
Can you set goals to reduce credit card spending and pay down debt? You’ll save hundreds to thousands of dollars annually, money you can invest, and watch grow.
Check your insurance coverage
Assess whether you have the right amount of insurance for your life stage and situation. For example, if you’ve accumulated considerable assets since you bought your homeowners insurance or renters policy, you may want to discuss an upgrade with your insurance agent or broker. Or if your children have graduated from college or you’ve paid off your mortgage, you may need less life insurance.