As we enter a new year, it’s essential to take a moment to reassess your financial situation and set yourself up for success. Whether it’s adjusting your cash flow, managing investments, or reviewing your estate plan, now is the perfect time to organize your finances for the year ahead. Below are key areas to focus on, ensuring you make informed decisions that support your long-term goals.
Personal Financial Review
Before diving into specific actions, start with a high-level review of your personal situation. Ask yourself:
Do you need to replenish your emergency fund? Unexpected expenses can derail even the best financial plans, so maintaining an emergency fund that covers at least 3-6 months of living expenses is crucial.
Are there any significant life events expected this year? Whether it’s a marriage, birth, job change, or retirement, these milestones can dramatically impact your financial situation, and planning for them is vital.
Cash Flow Management
Effective management of your cash flow is a cornerstone of financial stability, ensuring you live within your means while still saving for the future. Start by evaluating your income and expenses:
Do you expect any material changes to your household income or expenses this year? If so, adjust your spending plan accordingly to avoid overspending or missing out on savings opportunities.
Review your employee benefits to ensure you are maximizing contributions to retirement accounts, Health Savings Accounts (HSAs), and Flexible Spending Accounts (FSAs). These accounts offer significant tax advantages that can save you money in the long run.
If you have leftover funds in your FSA from last year, make sure to spend them before they expire, as many plans have a grace period that ends early in the year.
Investment and Retirement Strategy
Starting the year with a solid investment plan is key to building long-term wealth. Take time to review your investment accounts and consider these steps:
Reassess your risk tolerance. Has your attitude toward risk changed, or have there been changes in your financial situation? If so, adjusting your asset allocation to reflect your current goals and risk appetite might be necessary.
Rebalance your investment portfolio. After reviewing your investment performance, ensure your portfolio is still aligned with your asset allocation strategy. If it’s skewed due to market performance, adjust to restore balance. Be mindful of tax implications, especially if you’ve engaged in tax-loss harvesting.
Consider spousal IRA options if your spouse has little or no earned income. Contributing to a spousal IRA can help maximize retirement savings and potentially reduce your tax bill.
Tax Planning Considerations
With tax season looming, early planning is your best ally in minimizing your tax burden and staying compliant with IRS rules. Here are some essential tax-related steps to get you started:
Collect tax forms and documents early to prepare for filing your income tax return. Organizing your information now can make the process smoother when Tax Day arrives.
Did you make taxable gifts in the previous year? If so, ensure you’re ready to file Form 709 to report these gifts. Understanding how your annual exclusion amount works can help you manage future gifting strategies more effectively.
Roth conversions might be a beneficial strategy for reducing future tax liabilities. Consider converting traditional IRA funds to a Roth IRA if your income is expected to increase in the future.
Estate Planning and Gifting Strategies
The beginning of the year is also an excellent time to review your estate plan:
Ensure your estate plan reflects your current wishes and that all documents are up to date. Review beneficiary designations on retirement accounts, life insurance policies, and other assets to confirm they align with your overall estate plan.
If you are charitably inclined and over the age of 70½, consider making a Qualified Charitable Distribution (QCD) from your IRA. This strategy allows you to meet Required Minimum Distribution (RMD) obligations while reducing taxable income.
Insurance Coverage and Risk Management
Insurance is a critical part of any comprehensive financial plan, providing protection for you and your family in case of an unexpected event. Here are some key areas to review:
Health insurance: If you anticipate changes in medical needs or treatments this year, evaluate whether your current health insurance provides adequate coverage. This is also an excellent time to explore alternative plans that may better suit your needs.
Review life insurance and disability coverage: As your life circumstances evolve, your insurance needs may change. Ensure your coverage amounts are appropriate, especially if you’ve experienced major life events like marriage or the birth of a child.
Consider Long-Term Care (LTC) insurance: If you haven’t yet explored LTC insurance, this year might be a good time to do so, particularly if you’re nearing retirement age. LTC insurance can help protect your retirement savings from being depleted by the high costs of long-term care.
Debt Management and Credit Review
Managing debt is an integral part of financial wellness. At the start of the year, consider reviewing your debt obligations:
Are there debts you’d like to eliminate this year? Prioritize paying off high-interest debts first, such as credit card balances. Reducing your debt load can free up more money for savings and investments.
Check your credit report for accuracy and consider freezing your credit if you don’t plan to apply for new credit this year. This can protect you from potential identity theft.
Conclusion
Kicking off the new year with a comprehensive review of your financial situation will help you make smarter, more informed decisions throughout the year. By managing cash flow, reassessing investments, optimizing tax strategies, and reviewing your estate plan and insurance coverage, you can confidently navigate the year ahead, ensuring your financial health remains strong and resilient.
WHWM is here to guide you in identifying your priorities, developing a plan, and making adjustments along the way. By choosing WHWM, you're partnering with our Founder and President, Stephen Bodwell. As a CPA and CFP® professional, Stephen is committed to helping you achieve your financial goals and aspirations. Don't hesitate to take the next step toward realizing your dreams. Schedule your complimentary, no-obligation 30-minute consultation with Stephen.
Walnut Hill Wealth Management, LLC (“WHWM”) is a registered investment advisor offering advisory services in the State of Texas and in other jurisdictions where exempt. The information provided is as of the date indicated and is subject to change.
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