Just as an annual checkup with your doctor can help you address problems before they worsen, it is equally important to perform an annual financial checkup.
You can assess your financial situation and what’s changed over the past year, set goals for the coming year, and create a budget to help you meet them.
Consider What’s Changed
Take a close look at things that have changed in your life over the past year, for yourself and your family. These should be things that could have a significant impact on your finances, such as:
- Employment and income (new job, loss of a job, income changes, retirement, etc.)
- Family changes: Marriage, divorce, or new family members
- Major purchases, such as a home or a car
- Significant health changes
- Economic windfalls, such as a bonus or inheritance
Review Your Budget
You should review your budget at least once a year. If you have never drafted a budget before, doing so can give you a chance to figure
out where you stand, and set new goals.
Start by looking at the financial statements from your credit card, checking, and savings accounts to get an idea of how much money you made over the past year, where it went, and where you keep it.
You can use this information to figure out your monthly income and expenses. One rule of thumb is to set your budget according to the 50/30/20 plan and break it down into three general categories:
- 50% for your basic needs. These are things you have to spend money on just to live, such as housing, grocery items, transportation, insurance, utilities, and minimum loan payments.
- 20% for your savings. This includes retirement plans, paying off debts, and setting something aside as an emergency fund or for major purchases, such as a home or vehicle.
- 30% for things you want, but may not need. This includes gym memberships, streaming services, entertainment, restaurants, and other nonessential goods such as expensive clothes or jewelry.
As you break your expenses into different categories, try to set new goals for the coming year. This may include reducing debts, cutting back on spending, and setting savings targets.
Try reviewing your budget on a regular basis, such as every month, to see where you need to adjust and how you could improve on the previous month’s performance.
While there are many free budgeting apps you can use to help this, Union’s MyFi 360 is uniquely integrated within your online banking. Once you setup each of your categories, this info will automatically populate within our app, allowing you to have a full 360 degree view of your financial picture. There is no cost and you can link outside accounts for credit cards, investments, etc.
Whichever method you use, the point is to check your spending and saving habits on a regular basis so you can meet your goals.
Consider Your Debts
Take a look at all your debts, including car loans and credit cards. Make a list of all your current balances, how much interest you’re paying on each loan, and your minimum monthly payments.
Make a plan to reduce your debt load or pay it off completely over the next year. This may require you to reduce your budget in other areas, but it can pay significant dividends in the long run by eliminating the cost of interest payments.
Keep in mind that mortgage interest is tax deductible when the money is used to buy a home. Student loan interest is also tax-deductible, up to $2,500 per year.
This is why many people focus on paying off their credit cards and other high-interest debts. They’re, not only expensive to finance they also don’t offer any tax advantages.
If you have more than one loan that you’re paying a lot of interest on, such as auto loans and credit cards, you might consolidate them with a personal loan or a home equity line of credit (HELOC). This way, you would wind up with just one loan, possibly at a lower interest rate.
You might also consider refinancing your mortgage if your home has increased in value and you could obtain a lower interest rate to save money.
Review Your Savings and Emergency Fund
Financial experts recommend having an emergency fund that would cover three to six months’ worth of your living expenses. Take a close look at your monthly expenses and whatever you have set aside, to make sure that your emergency fund is large enough to meet your obligations.
If you need to start an emergency fund, consider adding this to your budget and financial goals for the year.
You might also need to save up for a major purchase, such as buying a home or a new vehicle, or a significant expense such as college tuition or a wedding.
Whatever you need to save for, consider automating your savings by having a certain amount or a percentage of every paycheck transferred into a designated savings account.
Doing this can make it easier for you to save because it automatically sets money aside before you can think about spending it.
In addition to how much you save, take a look at where you keep your emergency funds. You could earn interest on a regular savings account, but you might also consider a money market account where you could earn more interest while maintaining access to your funds.
Depending on how much you save, and when you might need the money, a certificate of deposit (CD) could also be a good option. These are available at terms from 31 days to 60 months. You’ll earn more interest with a longer-term CD than a shorter one, but you would not be able to access these funds until a CD comes to term.
Some of our customers use what is known as a CD ladder, where they keep parts of their savings in CDs of various term lengths. This way, they could use their regular savings or money market account to cover any short-term contingencies, until one of their CDs comes to term and those funds become available.
Check Your Credit Score
You can get a free credit report once a year from the nation’s three credit reporting agencies: Equifax, Experian, and Trans Union. The easiest way to do so is through AnnualCreditReport.com.
Take a close look at your credit reports and make sure they do not contain mistakes. You may have an old account or a loan that you forgot about, or some scammer could have taken out a loan in your name. If you find mistakes, you can address this by contacting whichever credit reporting bureaus list this information in their report.
Your credit score has an impact on your ability to obtain loans and the interest rate you would have to pay. It can also impact your ability to get a job. You might make improving your credit rating part of your financial goals this year.
Two of the biggest factors affecting your credit score are your payment history and how much debt you have. Payment history refers to paying your bills on time, including your loans and credit cards.
The amount of debt you have includes your overall debt load and your credit usage. If you frequently approach the limits on your credit cards, this can negatively impact your credit score.
You might ask your credit card company to increase your credit limit, which you can typically do once every six months. This can negatively impact your credit rating, but this is usually short-lived.
As long as you avoid maxing out the new credit limit on your card, this higher level can improve your credit rating in the long run.
Review Your Insurance Coverage
Just as your financial needs change over time, the amount of insurance you need can also fluctuate. Your home may have increased in value, which could be a reason to increase your property insurance.
If your marital status changes, or if you have a new family member, you may need to buy or adjust your life insurance to increase coverage or change your beneficiaries.
Some employers offer life insurance for their employees, based on their annual salary. Unfortunately, this might not be enough for your family. Many financial advisors recommend life insurance coverage worth 10 times your annual income, just to make sure your family can deal with the loss of income.
In deciding whether you need more life insurance coverage, take a look at your monthly expenses and consider how your family would meet those obligations without your income to rely on.
Depending on your age, you might also consider buying a long-term care insurance policy. Many financial advisors recommend this coverage for those age 50 or more, and this coverage can be difficult (and expensive) to obtain in your 60s or 70s.
NOTE: Insurance products are not deposits and not FDIC-Insured.
Evaluate Your Retirement Funds
If your employer provides a 401(k) plan, try to contribute as much as you can. If your employer matches your contributions, you could make the most of this by contributing whatever it takes to receive that full benefit.
For example, if your employer matches your contributions up to 4% of your pretax income, you would be leaving free money on the table if you failed to contribute at least that much of your salary.
Of course, traditional 401(k) plans are your only option for retirement planning. You might also consider opening an individual retirement account (IRA) of which there are two options.
With a traditional IRA, you can contribute up to $6,000 per year (or $7,000 for those age 50 or more) in pretax dollars. This would reduce your taxable income for the year, although you would pay income taxes on this money when you withdraw it in retirement.
Roth IRAs have the same contribution limits as traditional IRAs, but you contribute to a Roth IRA with your after-tax dollars. This means you wouldn’t have to pay income taxes on these funds when you retire.
While retirement might seem like a long way off for some people, keep in mind that the more you set aside today the more you can benefit from compound interest where your investment grows on itself each year—and the more you set aside the less you’ll have to worry about having enough to retire on.
NOTE: Investments are not deposits and not FDIC-insured. Investing involves risk, including possible loss of the principal amount invested. Consult your financial advisory team.
Take a Look at Your Estate
If you do not have a will, this could be a good time to consider drafting one. If you do have a will, it may need to be updated to reflect any changes in your life.
This is especially true if you had a major life change such as marriage, divorce, or the number of people in your household.
A will can make sure that your family is taken care of, in a way that you would prefer. It can also help your family avoid the kind of legal squabbles that could happen if you pass away without an estate plan in place.
As you examine or draft your will, consider who you designate as your executor, trustee, and the names of anyone to whom you grant power of attorney in case you become unable to make decisions on your own.
We Can Help You Meet Your Financial Goals
At Union Bank we help our customers throughout West Central Arkansas and the River Valley with their savings and investing needs. If you’d like to open a savings account, start saving for retirement, or would like to learn more about your debt consolidation loan options, please contact us or visit one of our locations in Mena, Paris, Hatfield, Wickes, Ozark, Waldron, Booneville, and Clarksville.