12 FINANCIAL TIPS FOR A FRESH NEW YEAR
A NEW BEGINNING
Perhaps we’ll be celebrating the end of a year rather than the beginning of one come 2021. But the beauty of a new year is the sense it gives us of a fresh beginning. While the challenges facing us in 2020 may not simply dissolve when the clock strikes midnight on January 1, we can still use the transition as a springboard for pursuing our goals.
Government-enforced shutdowns, roiling markets, and multiple levels of stimulus—real and discussed—have made money a focal point in everyone’s lives. Whether you’re retired, still working, or just getting back to work after a long year of unexpected twists and turns, it’s worth addressing the state of your finances. No matter what new developments come our way, the following 12 tips can help you begin a focused and strong new year.
1. ORGANIZE YOUR BALANCE SHEET
It’s hard to know if you’re moving forward if you don’t know where you started. Begin your year by creating a personal balance sheet listing your assets and liabilities and determining your net worth from there. With this baseline, you can gauge your progress throughout the new year and set your trajectory. You can see your net worth on the Day Hagan Client Portal, or you can calculate it yourself using the Day Hagan Private Wealth Balance Sheet.
2. REVIEW YOUR BUDGET
Now that you have a pretty good idea of what you have, you can start making judgments about what you’re spending. Review your credit card and bank statements to catalog your spending habits. Even if you’re comfortable with your current cash flow, it’s worthwhile to periodically reassess where your money is going. Lifestyle creep—spending more because you can afford it, not because you need to—is a real phenomenon. Reviewing your budget can help you maximize your cash flow, rebuild your emergency fund, and direct your finances where you want them to go. You can link your accounts to view your net worth on the Day Hagan Client Portal, or use a finance aggregate app like Mint. If you prefer to break it down yourself, Dave Ramsey offers a helpful cash flow statement worksheet that categorizes your expenses into bite-size chunks. Once you see how you’re spending your money, you can make a judgment call about its impact on your overall plan and make adjustments.
3. ESTABLISH NEXT YEAR’S VISION
Every December, I sit down with my balance sheet and cash flow statement (as well as a list of non-financial accomplishments I’ve made during the year) to determine what I want to do and where I want to go next, and how I can improve upon highs and lows from the year. These aren’t resolutions so much as points on a map that help me determine my direction. If I know that I want to take a trip in the summer, for example, I make sure that my cash flow won’t suffer for it and my other goals—like maxing out my Roth or contributing to my 401(k)—are also accomplished without compromise. We don’t have a crystal ball for 2021, but, as Zig Ziglar famously stated, “If you aim at nothing, you will hit it every time.”
4. CREATE A FINANCIAL FIRST-AID KIT
While you’re going through all your documents, take time to get your affairs organized, especially since this year has seen so much change. This can mean collecting financial and Social Security statements, bills and payments, taxes, estate documents, insurance policies, lists of your passwords and logins, and other necessities into a binder, box, or folder. Not one for paper? Save digital versions of your documents (except originals you need, like birth certificates, Social Security cards, and titles) on a thumb drive. You can also upload your files to the Day Hagan Client Portal document vault. Whether you use paper or the computer, you can easily access, search, and, in the event of an emergency, grab your documents. Furthermore, having an updated and organized personal finance system can help your family handle your estate when you’re gone.
5. CONTRIBUTE TO YOUR RETIREMENT
Still working? Now that you know what your cash flow looks like, explore the possibility of contributing a little more to your retirement in a way that won’t materially impact your lifestyle. Not only can this strengthen your long-term financial plan, but your contributions might also lower your tax burden for the year. Annual contributions to retirement plans such as 401(k)s, 403(b)s, and SIMPLE IRAs must be made by December 31. And while you have until Tax Day 2021 (April 15) to contribute to an IRA (traditional, Roth, or SEP), it doesn’t hurt to get that money into your account if you have it available, potentially saving future-you a last-minute scramble. Talk to our team at Day Hagan to strategize your retirement contributions.
| 2020 Employee Contribution Limits | Deadline | |
|---|---|---|
| 401(k), 403(b), most 457s, TSP | $19,500 ($6,500 catch-up) | December 31, 2020 |
| Traditional & Roth IRA (Total) | $6,000 ($1,000 catch-up) | April 15, 2021 |
| SEP IRA | 25% of compensation, up to $57,000 | April 15, 2021 |
| SIMPLE IRA | $13,500 ($3,000 catch-up) | December 31, 2020 |
6. DECIDE WHAT TO DO WITH YOUR BONUS
If you’re expecting a bonus this year, make a plan for how best to use it, whether that means investing it, gifting it, paying down debt, or contributing to your retirement accounts. You may also wish to defer your bonus into the next year if it bumps you into a higher tax bracket, especially if you expect your income to decline in 2021.
7. EMPTY YOUR FSA BALANCE
Flexible Spending Accounts (FSAs) are accounts offered by some employers into which you can set aside money that will not be taxed. The funds in an FSA can be used to pay for certain out-of-pocket health care and dental costs, including copays, deductibles, and some prescription drugs and insulin. However, the balance in your FSA usually must be used within the plan year. Even though some employers offer the option of a 2 ½-month grace period or a carryover of up to $500 to use in the following year, if you have an FSA, confirm you’re not missing out on any benefits if you don’t use the full amount by the end of the year.
8. CONSIDER ADDING TO YOUR HSA BALANCE
Health Savings Accounts (HSAs) are tax-advantaged accounts available to some individuals enrolled in high-deductible health plans (HDHPs). The funds can only be used for qualifying healthcare expenses, but contributions are either pre-tax or after-tax deductible. Withdrawals are tax free, as are earnings (which are minimal), and any money left in the HSA at the end of the year rolls into the next. If you have an HSA, you might consider contributing to it (2020 maximum contribution is $3,550 for individuals, $7,100 for families, with additional catch-up of $1,000 for those 55+) to save on taxes for the year.
9. REVIEW YOUR PROTECTION
The end of the year is a good time to reevaluate your insurances. Determine if you still have the proper coverage, need to drop any, or need to add some. If you shop around a little, you might even be able to find the same or better coverage for a lower premium. Bundling your insurances, such as home and auto, with the same provider can likewise save you money. Depending on your age and situation, you may want to investigate disability insurance or long-term care insurance. Day Hagan’s team of insurance specialists can help you navigate your options.
10. HARVEST TAX LOSSES
No one likes to pay taxes, let alone more than they need to. At Day Hagan, each year we review our clients’ accounts to maximize tax savings in their investments by harvesting tax losses—selling securities at a loss to offset gains made during the year. If you have accounts elsewhere, be sure to review them and consult with your advisor or accountant for year-end tax-loss harvesting strategies that could save you money.
11. BALANCE TAX OBLIGATIONS
Speaking of taxes, another aspect of tax management involves your tax bracket. If you’re on the cusp of a new tax bracket, monitor any income that might push you up to the next level. Deductions for charitable donations or prepaying costs like property taxes can help offset income to keep you out of the next bracket, or lower your tax obligations. Another tactic, particularly if you are a business owner or freelancer, is to defer some income until 2021. Be sure to consult with your accountant on actions you can take before the end of the year.
12. GIVE A GIFT
Each year, individuals are allowed to make gifts of up to $15,000 (2020; per recipient) to anyone without impacting your lifetime estate tax exemption amount or triggering gift taxes. Some people use this as an opportunity to pass wealth down to the next generation without tax consequences. It can also be used to fund 529 plans for children and grandchildren. If you’re philanthropically inclined, the holidays are a great time to support your local charities and causes, which can earn you tax deductions for 2020. If you typically don’t contribute enough to charities in a single year to itemize your taxes, consider giving several years’ worth of contributions at once. Charitable giving is also an easy, effective way to divest yourself of highly appreciated assets without having to pay the capital gains taxes on them.
Typically, we would also remind you to take your required minimum distribution (RMD) for the year from your personal IRA (if 72 or older) or inherited IRA. However, due to the passage of the CARES Act in March, RMDs have been waived for 2020.
While 2020 has been full of challenges and surprises, we can still enter 2021 with a solid, optimistic vision of the future, knowing that we have taken steps to achieve it. If you think these tips could help someone you know, please share this article with them.
Happy New Year!
Natalie Brown, CFP®
Director of Client Services
Day Hagan Private Wealth
—Written 11.25.2020.
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