The summer months allow most of us a chance to slow down and catch up — on relaxation, on chores and with a bit of scheduling and focus, on our money goals.
Setting a few hours aside for a midyear financial checkup in June or July can help you review how you're doing with savings, investing, spending and debt. It can give you the opportunity to spot irregularities and adjust your budget well in advance of year-end. It may also let you rethink your summer holiday expenses.
Everyone can benefit from a summer financial checkup, but the practice is particularly important for people who don't receive a regular paycheck or have recently experienced a big change in their financial lives, such as a new job with a salary change, a marriage or divorce or the birth of a child. No matter what your circumstances, a midyear checkup can set new priorities or solve problems before finances get out of control.
If you already work with a qualified financial or tax advisor, consider discussing this review process with them so they can guide you to any specific money issues you should be tracking.
In general, here are some of the major subjects worth putting on a financial checklist at midyear.
Start by requesting at least one of your three credit reports. The idea is to make sure your credit balances are accurate and to check closely for any irregularities that might signal identity theft. The Fair Credit Reporting Act requires that each of the major credit agencies – Experian, Equifax and TransUnion – give you your most recent credit reports for free once a year.
If you discover unusual charges or accounts you didn't open, alert your advisors, take any steps they recommend and otherwise follow the U.S. Federal Trade Commission's step-by-step identity theft guide to help you take action. Remember to stagger receipt of each of your free credit reports throughout the year so you have the opportunity to catch potential irregularities every few months. Getting all three reports at one time means you might miss potential errors or fraudulent accounts unless you pay for additional reports during the other 11 months of the year.
Next, review your budget or start one if you've never made one before. People who actively budget generally review their savings, spending and investing activity monthly. The midyear review should focus on whether adjustments can be made to save or invest more, particularly if more money is coming in from a raise or other resources. If spending is up by midyear, it's always important to know why and evaluate if that spending is absolutely necessary.
Retirement contributions should be the next stop. A midyear budget review should identify opportunities to increase retirement contributions either at work or in personal retirement accounts. Individuals who reach age 50 by the end of the calendar year will be able to take advantage of additional catch-up contribution allowances to beef up their balances as they approach retirement. If more money is coming in by midyear, make retirement savings a priority – pay yourself first.
Check the level of your emergency fund. The number should fit your needs, but it is advisable to have money in savings equal to four to seven months of everyday expenses in case there's a short-term job loss or an emergency repair. Emergency funds help keep you from tapping credit or your savings balances in a sudden cash emergency. Consider keeping a year-round list of potential home, car or personal expenses and decide whether your emergency fund is adequate or if a separate savings account should be set up to address those outside needs.
Above all, if things are uncertain at work, make adjustments in your emergency fund while considering whether now is the time to be looking for a new job.
Make sure your tax withholding levels are correct. This is particularly important if your income has changed during the first six months of the year and you might be closing in on a higher or lower tax bracket. And if you've lost a job or your income has fallen, that's another reason to evaluate your withholding. Consult your tax advisor for assistance, and the IRS features its own withholding calculator to help you decide. If you think you'll have to pay more taxes next year, get some advice on how to best reduce your taxable income in advance. Last-minute moves at the end of the year can be significantly more difficult.
Finally, make sure all your recordkeeping is up to date. Midyear is a good time to look over all your spending, saving and investment records to make sure all the numbers add up and underlying paperwork is in order.
Speaking of paperwork, consider whether you can save more time and money by moving to online banking, investing and bill payment. Streamlining processes and catching calculation, documentation and filing problems now can help you considerably at year-end and tax time next year.
Bottom line: A midyear checkup can save time, money and help you stay on course on all financial issues.
Jason Alderman directs Visa's financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney
- Americans spend an average of 20 years in retirement. If you're not saving, it's time to start. Begin small if you have to, and try to increase the amount you save each month. The sooner you start putting funds aside, the more time your money has to grow.
- Experts estimate that you will need about 70 percent of your preretirement income — for lower earners, the figure is 90 percent or more — to maintain your current standard of living when you stop working. Use this calculator to come up with a ballpark estimate. Research shows that people who try to estimate their needs in advance ultimately save more for retirement.
- If your employer offers a retirement savings plan, such as a 401(k) plan, sign up and contribute as much as you can. Your company may kick in a match, and deductions can be automatically taken from your paycheck. Over time, compound interest and tax deferrals can make a big difference in the amount you accumulate. Make sure your plan isn't a lemon by searching the website Brightscope.com. If it falls short, ask the management to do something about it.
- How you save can be as important as how much you save. Inflation and the type of investments you make play important roles in how much you'll have saved at retirement. Know how your savings or pension plan is invested. Learn about your plan's investment options and ask questions. Put your savings in different types of investments. By diversifying this way, you are more likely to reduce risk and improve return. Your investment mix may change over time depending on a number of factors such as your age, goals, and financial circumstances. Financial security and knowledge go hand in hand.
- If you withdraw your retirement savings now, you'll lose principal and interest; you might lose tax benefits or have to pay withdrawal penalties. If you change jobs, leave your savings invested in that employer's retirement plan. Or roll them over to an IRA or your new employer's plan.
- The cost of your investments makes a big difference. Index funds are a good option for reducing costs. The Labor Department provides this example: Assume that you are an employee with 35 years until retirement and with a 401(k) account balance of $25,000. If the returns on investment for your account for the next 35 years average 7 percent and the fees and expenses reduce this by 0.5 percent, your account balance will grow to $227,000 at retirement, even with no further contributions. If the fees and expenses are 1.5 percent, however, your account balance will rise to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.
- You can put as much as $5,000 a year into an individual retirement account (or IRA). Those 50 or older can contribute even more. You can also start with much less. IRAs also provide tax advantages. When you open an IRA, you have two options: a traditional IRA or a Roth IRA. The tax treatment of your contributions and withdrawals will depend on the option chosen. You can set it up so that an amount is automatically deducted from your checking or savings account and deposited in the IRA.
- Social Security pays benefits that are on average equal to about 40 percent of what you earned before retirement. You should receive a statement each year that gives you an estimate of how much your benefit will be and when you can receive it. For more information, visit the Social Security Administration's website or call (800)772-1213.
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