An 8-Step Annual Financial Checkup

How did you do financially last year? It’s a curious question to ask entering a new year, wouldn’t you say? But only by measuring your progress in the most recent year can you get yourself mentally and financially prepared for progress in the year that’s now upon us. That’s why we’ve created the 8-Step Annual Financial Checkup.

Our hope is that you will not only use it to measure your success in the year just ended but also begin preparing for the next financial checkup at the end of this year. We’ve segregated your finances into eight distinct categories, each with a short list of subcategories. By looking at each, you can better assess exactly what it was you accomplished in the prior 12 months.

1. Your Budget

We’re going to start here because a budget is truly the foundation of all personal and household finances. If your budget is working as it should, you can practically put your goals on autopilot! If you have no budget, it will be tough to accomplish anything at all.

If you don’t have a budget, make one. Not having a budget just means that now is the time to get started. Fortunately, there are good budget software apps you can use that will not only help you put a budget in place, but are also practically automatic when you link your bank accounts and credit cards.

Review your budget. You should be reviewing your budget at least monthly to make sure that it is doing its job. Make sure that expenses are being properly categorized and income is being fully recorded. Your budget should be providing you with a good picture of your cash flow, and - particularly - of how much you have left over after all of your expenses are paid. Of course, that’s the whole purpose of having a budget.

Adjust savings, investment, and debt payoff allocations. Your budget should reveal that you have a positive cash flow. What you do with that surplus will make all the difference in your finances going forward. Make sure that it is going toward those categories that will improve your situation - including savings, investments, and debt payoff.

2. Your Investments

Setting your investments on autopilot makes the job easier. But, you still need to do a review of your progress at least annually.

Reassess your risk tolerance. As you get older and your circumstances change, it's likely that your risk tolerance will too. This is especially true as you get closer to retirement, but there are other factors as well. For example, if a10% decline in the market would spook you, you may want to lower your exposure to equities. You can check out our comprehensive series on asset allocation for more information.

Rebalance your portfolio. Many managed portfolios, such as robo advisors, do this automatically. But, if you have multiple investment accounts, you may have to make some manual adjustments. The only way to do this is by knowing what your big-picture portfolio allocation is. Once you do, you can rebalance accordingly. You should be rebalancing your investments on a big picture level at least once a year.

3. Your Debts

The ultimate objective with debt is to make it go away, at least in time for retirement. The only way to do that is if you are tracking it regularly.

Do an annual debt summary. It’s easy to get so accustomed to debt that you simply pay the monthly bills, and ignore the big picture. You may have no idea how much total debt you’ve actually accrued! At least once a year you should summarize all of your debts so that you know exactly how much you owe. In addition to assembling your various loan account statements, you should also get a copy of your credit report at least once each year to make sure you don’t miss any obligations. This will also be an important opportunity to examine your credit report for potential mistakes.

Evaluate your progress in getting out of debt. An annual debt summary will also indicate the total level of debt from one year to the next. That level should be declining each year. If it isn't, the summary will give you an opportunity to implement strategies to make it happen.

Look for opportunities to lower your interest rates. The summary will provide a chance to review the interest rate you’re paying on your loans. You should compare these rates to what is available elsewhere. You may be able to obtain lower rates on credit cards or your mortgage with a little bit of research. Lower interest rates help improve your cash flow and enable you to dedicate more cash flow to the repayment of debt principal.

4. Your Retirement

At least once a year, review your retirement savings to make sure the level is consistent with your retirement goals.

Are you maxing out your retirement contributions? Are you making the maximum contribution that you can to your 401(k) plan? If not, you should raise your contribution level to at least maximize the employer matching contribution. Once that’s done, you can make a decision to contribute even more to the plan or to direct additional savings into other retirement vehicles like a Roth IRA. A Roth will add income tax diversification to your retirement since the withdrawals from the plan are not subject to income tax.

Evaluate your retirement account locations. Specifically, this means knowing where your retirement money is at after you’ve left a job. If you’re letting the money sit in the original plan, is that really the best place for it? Would you be better off if you could move the money into a self-directed IRA which offers more investment opportunities?

See also: The best places to open an IRA

5. Update Your Short- and Medium-term Savings Goals

You probably have more savings goals than just retirement.

Make sure your emergency fund matches your current circumstances. Ten years ago a $5,000 emergency fund may have been adequate for your circumstances. Is that still the case? Have your income and expenses grown to a point where the fund needs to be increased? If so, there are relatively painless ways to increase your emergency fund.

Creating and updating contingency savings plans. You should have savings plans set up for known contingencies. This could include replacing the roof on your house, replacing your car, or even saving money for a vacation. By adding budget categories for each of these contingencies, you can build the accounts gracefully and avoid a last-minute scramble to raise the money - or worse yet, borrow it.

Review college funding for your children. If you have children, you should be making some sort of provision for their college education. You can do this by creating and funding 529 plans or a Coverdell Education Savings Account, both of which come with certain tax advantages.

6. Your Financial Goals

Hopefully, you’ve established these in previous years, but if you haven’t now is an excellent time to set some. Goals are really milestones that we use to measure forward progress.

Review your previous goals. Setting goals can result in dramatic improvements in your finances, but only if you know what the goals are, and you keep reminding yourself that you have them. This is one step you probably should take monthly, rather than annually. Reinforcement is how you make goals real in your life.

Evaluate your progress toward your goals. A goal is a wish with an action plan attached to it. That means you should be making steady progress toward reaching that goal. You should regularly review the progress to make sure that it's happening, but also to tweak your action plan to help you accomplish the goal even quicker.

Assess the impact of changing circumstances and priorities for your goals. You may find that as your life changes, certain goals may become more important, others less so, while still others are fit to be abandoned. At least once each year, make sure that your goals are consistent with where you are in life right now. If you have achieved a goal, celebrate the victory, then cross the goal off your list. It may be time for a new one.

7. Get Ready for April 15th

Procrastination can cause unnecessary stress, result in mistakes, and even force you to request an extension to file. You can avoid all of that with some advanced preparation.

Make any deductible expense payments/contributions by their due dates. Many income tax deductions are time-sensitive. For example, some deductible expenses must be paid by the end of the calendar year; others, such as retirement contributions, don’t need to be made until April 15 (or the date tax returns are due). You should take steps now to maximize your deductions so that you’ll give yourself plenty of time to do what needs to be done.

Gather your tax-related documents. You should have a tax folder in your home or office where you accumulate documentation for any transactions that may significantly impact your income tax return. This will enable you to search a single source for the documents you need, rather than being forced to retrieve them from banks, employers, or a dozen other cubbyholes in your home.

Hold an annual meeting with your tax preparer. This is an opportunity to assess where you are with your income tax status, pending changes in tax law, and create strategies to lower your tax bite in the future. Also, make sure to ask about contingency tax situations - such as changes in your tax profile that might trigger the alternative minimum tax (AMT) in a future return.

Adjust your withholdings or tax estimates. If you owed money on your last tax return, you can probably fix that situation by making a one-time upward adjustment in either your payroll withholding or your estimated income tax payments. Conversely, if you got a big refund, you may want to lower those tax contributions to a number that is more consistent with the actual amount of money that you will owe.

8. Your Insurance Coverage and Final Arrangements

This is another review that many people overlook, often for years at a time. The result of such neglect could be that you have either left yourself dangerously exposed to potential calamities or that you pay too much for the coverage that you have.

Review your insurance policies. The review should include all of your insurance policies, including life, health, auto, homeowners, and any business insurance policies that you have. Make sure the level of coverage you have is consistent with your current financial circumstances. It’s very likely that the policies you took out a decade ago are no longer adequate for your current level of income or expenses.

New Option: Haven Life offers term life insurance, and in many cases they don’t require a physical exam.

Look for savings. In reviewing your policies, look specifically to see if you might be over-insured in any area. A good example is life insurance. If you no longer have dependent children, you may not need as much coverage as you had before. You should also shop to see if you can replace any current policies with less expensive options from competitors. Finally, take a close look at the deductible on each policy. If you have more savings available than you had in the past, you may be able to increase deductibles and save a lot of money. Car insurance deductibles are an excellent example. If you have an extra $5,000 in your emergency fund, you can safely increase your car insurance deductible from, say $1,000, to $5,000 without increasing your personal risk.

Makes sure you have all necessary coverages. This can include insurance on your business, and especially disability insurance. Both types of coverage relate to your ability to earn a living and are often overlooked in favor of saving money. But, if you have the extra cash flow available, at least some of it should be earmarked for income protection insurance.

Update your will. It's not uncommon for people to create a will, then forget about it for the next 20 years. The problem is that your circumstances will change as the years go by. The review of your will should include updating beneficiary information and allocations. You should also make sure that designated custodians for your children are still reliable (relationships do change over the years!). In addition, substantial improvements in your net worth will usually require changes to your will. This should be done at least once each year.

Wrapping Up

There’s no doubt that an annual financial checkup can be a complicated process. We hope this checklist will make it simpler! You can make the entire process easier by reviewing individual areas throughout the year. Regardless of your process, just make sure that it gets done. Reviewing your finances is your best chance to make sure that your finances are moving forward and that you’re on track to reach your goals.