With January recast as wellness month – a time to reset, reflect, recharge and reorganize – it’s also a good moment to check in on your financial health.
We all lead busy lives. As you’ve spent time climbing the professional ladder, you might have put some things in place but haven’t reviewed them in a long while. It’s easier to navigate economic challenges, build your wealth and work toward long-term financial stability with a firm foundation of positive financial behaviors. Make these friendly reminders a cornerstone if you aspire to enhance your financial fitness:
Know where your money goes – We already know that within your budget, you’re breaking down expenses into two categories – needs and wants. But how about diving deeper into those wants? Consider all expenses and areas to adjust and strengthen your financial plan.
There are budgeting tools and worksheets that can help you with a framework to manage your finances efficiently. They’re designed to help you track expenses, plan for future costs and achieve your financial goals.
Follow the 70% rule – You can craft an effective spending and savings plan by using the 70% rule. Following this rule requires a designation of 70% of your income on expenditure or lifestyle costs, 20% on debt reduction or emergencies and 10% on long-term savings like a 401(k) plan or college fund.
Consider the paycheck budget method – This method talks about assigning specific tasks to each paycheck. One paycheck could be earmarked for essential expenses like your mortgage or rent and taking care of where you live. The next paycheck may handle other items like car payments, saving for your future and so on.
Keep tabs on your debt – Never ignore your debt. We know that’s been easier said than done, especially during the December (and looming February) holidays. Not keeping up to date on your debt could impede your financial stability in the long run. Get proactive. Dive into your student loans, credit cards, auto loans, mortgages, etc. Explore new ways to lower your interest rates. Exercise caution with spending and prioritize managing your debt.
Review your financial goals – Whether aiming for a specific retirement age or funding your child’s education, you already know that identifying those goals is your first step. Conduct a gap analysis to reveal the disparity between your current and desired financial situation.
Enhance your retirement savings – Consider applying the rule of 72 to estimate the time required to double your investment – that is, divide 72 by the annual rate of return. The result provides a rough estimate of the years it will take to double your initial investment.
As you know, starting early has significant advantages. If you contribute $5,000 to your investment account in the initial 10 years of your employment, even with no contributions in the next 20 years, you will outperform someone who delayed their contribution during this period and contributes $5,000 annually for 20 years. Despite the latter doubling his or her investment, your early savings benefit from compounding, enabling you to accumulate more in the long run with less total investment.
Keep updated on rule changes – Stay informed on changes affecting Required Minimum Distributions (RMDs), inherited IRAs, IRA distributions, student debt and 529 plans. You might be able to leverage the recent modifications that took effect at the end of 2022 to your advantage.
For example, you can now roll over your 529 plan assets to a Roth IRA for beneficiaries, subject to annual limits and a $35,000 lifetime cap after 15 years. Rollovers must adhere to five years and count toward the annual Roth IRA contribution limit.
Remain tax diversified – Remember to diversify your tax treatment continually and not just your investments. The taxable bucket includes income, CDs, money market accounts, mutual funds, stocks, bonds, real estate and more. Taxes hit hard here. In the tax-deferred bucket, options like 401(k) plans, traditional IRAs and SEP/SIMPLE IRA contributions grow tax-free, but withdrawals face uncertain future tax rates.
On the other hand, in the tax advantage bucket, which includes the Roth IRA, Roth 401(k), Roth 403b, municipal bonds and deferred annuities, more contributions get taxed, but the death benefit income, funds growth and distributions are tax-exempt. Balancing all three buckets helps manage taxes now and in retirement, optimizing your financial plan.
Reallocate and rebalance – Determine your risk tolerance and choose investments that align with personal comfort during market fluctuations to maintain a balanced portfolio. Additionally, rebalance your portfolio annually to mitigate risks. It ensures you return to your desired asset allocation. Remember to consider the company size, domestic versus international and stocks versus bonds in the process.
Understand your retirement goals – You’re able to visit the Social Security website to obtain an estimate of your benefits. Verify the accuracy of your work record and wage information with the Social Security Administration. Use those findings to align investments with your risk tolerance, rebalancing annually for effective risk management.
Remember the 4% rule for your 401(k) to estimate yearly withdrawals. If you assume a $1 million retirement balance, a 4% withdrawal equals $40,000, combined with Social Security. Understand your pension forecast, regardless of age, planning for single or joint life options and securing your family’s financial well-being. Early consideration enhances fund sufficiency and family protection.
Plan for volatility – You can plan for financial volatility by organizing your money into three buckets:
- Allocate 5 to 20% to the short-term bucket. It safeguards cash and emergency funds, utilizing assets like money market funds and CDs.
- For intermediate-term goals, allocate 30 to 70%. Focus on liquid investments like stocks and ETFs to outpace inflation.
- Long-term goals (25 to 50% allocation) involve less liquid assets, such as annuities and individual stocks, for growth-oriented objectives like retirement and legacies.
Adjust allocations based on risk tolerance, aiming for growth and managing headwinds.
Be protected – Safeguard your income with adequate life insurance coverage. Evaluate your family’s financial needs, considering current and future obligations. Assess available resources and bridge the gap with life insurance, ensuring financial security.
Life insurance is valuable throughout various life stages, addressing needs like mortgages and providing a legacy. Explore cash value life insurance for added benefits that include borrowing flexibility, tax advantages and no funding limits, enhancing financial planning.
Understand key aspects of disability insurance, such as coverage incentives, tax implications and benefit maximums, ensuring comprehensive protection. Supplement employer-paid disability plans with individual policies for enhanced income replacement.
Determine your longevity plan – Now, more than ever, you should prepare for a robust life beyond retirement. Address inflation, consider life transitions with age advancement, prioritize your physical and mental health and plan for your retirement home and transportation needs.
It’s essential to keep your key documents updated. These include your last will and testament, power of attorney, living will, health proxy and updated beneficiary designations. A HIPAA form is vital for medical records access, and a digital fiduciary manages online accounts. Ensure you have a comprehensive plan if you have special needs members. It’s always a good idea to review your estate plan every five years for relevance and effectiveness.
Failing to plan is planning to fail. Start proactively managing your financial health today.
Ben Soccodato and Chris Kampitsis head The SKG Team at Barnum Financial Group in Elmsford.
