As 2019 comes to a close, it’s important to take a moment to reflect on the year, including your finances, too! To make things a little easier, we’re going to take a look at a few financial planning tips and end-of-year considerations to start you off right in 2020!
1. Review your budget and plan for the year
It’s difficult to adequately stress the importance of an ironclad budget so that you can track progress toward your financial goals and plan for the year to come. If you didn’t do so for 2019, in the New Year consider:
Creating a detailed budget of anticipated expenses – It’s a simple mantra, but it bears repeating: planning ahead will keep you out of debt, and having a detailed weekly, monthly, and yearly budget is essential to staying ahead financially. Think about your weekly expenses and plan ahead by week and month, including basic expenses such as transportation costs, groceries, credit card debt, student loan payments, or other regular expenses.
Tracking your expenses weekly and monthly – While tracking expenses isn’t the most exciting activity, it is of tremendous benefit to your personal finances. By comparing your projected expenses with your actual expenses, you can gain invaluable insights into your spending habits and can more accurately project your budget for the year to come.
Reviewing your finances annually and reflecting – In addition to ensuring adequate funds, having easy access to past expenses is the best way to get a head start on your next year of planning. By reviewing to see how your expenses compared to the year before, you can establish a baseline for what you might spend next time around.
When reflecting, some questions to ask yourself are: did you spend more than anticipated or less? Did you take on debt or add to your savings? Where are you relative to your long-term savings goals? These are all important considerations when planning for the New Year. For example, if you took on debt last year, you’ll need to plan to spend less in the coming year and account for any required payments.
2. Consider holiday expenses, major purchases, or debt obligations
While maintaining basic weekly and monthly budgets is essential to a successful year financially, it’s also important to consider other major expenses that fall outside your day-to-day budget. For instance, the holidays are often an expensive time of year when bills and debt can stack up fast.
When planning for the coming year, make sure to take into account hidden holiday expenses such as travel costs, dry cleaning and wardrobe expenses, meal ingredients and holiday drinks, and gifts. It’s easy to underestimate how quickly and high these varied expenses stack up, and that’s just thinking about one holiday season! Try to anticipate as many other potential large expenses as you can, such as birthdays, vehicle inspections/maintenance, medical bills, or vacation/wedding travel costs.
Lastly, ask yourself whether you’ll be making any major purchases in the coming year or two? For instance, if you’re considering the purchase of a new home or vehicle, planning ahead and saving up for a meaningful down payment now can save you thousands in the long run.
3. Assess your tax situation
As 2019 grinds to a close, there are a few last-minute tax-related considerations for you. Check out our previous article on end-of-year tax considerations, or review the bullet points below:
Sell losing investments to offset gains – “tax-loss harvesting” is a valuable end-of-year tax strategy that involves selling underperforming stocks or losing positions. By doing so, you can help mitigate out tax on capital gains.
Give a tax-free financial gift – Until December 31st, you may give a financial gift to any number of individuals without having to file for a gift tax return, albeit with a few limitations. If you file as an individual you may give a gift of up to $15,000 to as many people as you like, or up to $30,000 per recipient if you file jointly with a spouse
Contribute to an education fund – A 529 plan is an education savings fund to which you may contribute up to a lump sum of $75,000 (and then nothing for five years) or $15,000 per year (currently). A 529 plan grows tax-deferred and the contribution may be tax-deductible (though not in Texas as we have no state income tax). Further, you can spend it tax-free as long as the funds from the account are dispersed for qualified expenses related to higher education, such as tuition, books, room & board.
As January approaches, it’s important to make sure you do everything in your power to save on taxes. Like always, planning ahead now will help save you untold sums in the long run.
4. Have a Savings Goal
The first priority should be to max out tax-deferred retirement savings, especially plans with employer matching. If you haven’t already contributed the maximum dollar amount allowed into your 401(k), 403(b) or other savings plan and you have extra funds, you should consider doing so. In tax year 2019, $19,000 is the maximum allowed contribution amount for individuals 49 and younger or $25,000 for individuals over 50 years of age.
In addition to ensuring your financial future, 401(k) contributions come with some additional benefits, like the fact that they reduce your taxable income and grow tax-deferred over time. While you can’t access the income until you’re 59 ½, you’ll ultimately pay less in federal and state taxes because the time-in-market allows your funds to accrue long-term compounding interest.
If you didn’t contribute to a savings plan available through your employer or lending institution, consider doing so for 2020. If you already have a 401(k), review your investment portfolio to ensure you’re on the right path toward your long-term goals.
Once your retirement savings are planned, focus on savings to establish a rainy-day fund, then any medium- or shorter-term goals you might have. For a rainy-day fund, 6 months of salary set aside to meet unplanned major expenses is a good guideline. Medium term goals might include things like a home down payment or vacation trip.
Are you looking for some help planning for the future? To schedule an appointment with a skilled financial advisor, contact Holdfast Wealth Management today.