Friday, May 24, 2024

Yearly Financial Health Checklist: 6 Essential Moves to Keep Your Money in Shape

Just as it’s important to schedule annual check-ups with your primary care physician, regularly assessing and updating your financial plan is an important strategy for long-term financial success. As your life evolves, your financial plan can fall out of alignment with your needs, or become less of a focus altogether. Life moves fast and priorities change, but that doesn’t mean your financial health should take a hit, and it’s never too late to rebalance and reevaluate your goals.

Taking a proactive approach to protecting your finances can help you stay on top of issues like debt accumulation or overspending before they become serious concerns or impede your long-term plans. Let’s look at six essential financial moves you can make to check in with your financial health and identify opportunities for increased awareness.

1. Check Your Credit

You may not think about credit scores regularly, but they play a critical role in your financial options. Your credit score will help dictate future interest rates, loan sizes, and insurance, and it can even impact your ability to rent or buy a home. The higher your credit score, the better terms and opportunities you receive as a borrower.

For example, a higher credit score could mean a several percentage point difference in mortgage interest. Over the lifetime of a 30-year mortgage, that equates to tens of thousands of dollars. 

Credit scores are determined by the three main credit bureaus: Experian, Equifax, and TransUnion. You may sign up to receive a credit report directly from any of the three credit bureaus, which will include your credit score. You could also choose to use a third-party credit monitoring service, such as Credit Karma, to track your score in an ongoing manner.

Each monitoring service and credit bureau follows a slightly different algorithm and criteria to determine credit scores, which means you’ll likely see your credit score vary across the different agencies.

According to the Consumer Financial Protection Bureau, credit scores are impacted by factors such as: 

  • Unpaid debt
  • Length of borrowing history
  • New applications for loans or lines of credit
  • Percentage of available credit used
  • Payment history (on-time payments versus late or missed payments)
  • Type of debt

How to Improve Your Credit Score

When you check your credit score regularly—ideally at least once a year—you give yourself time to improve it. You may want to work on increasing your credit score if you’re unhappy with your current one, or preparing for an upcoming credit check. 

By understanding what factors impact your score, you can start strategizing ways to improve it. Namely, you’ll want to focus on things like:

  • Paying down debt
  • Increasing the amount of credit available to you (opening another credit card, for example)
  • Reducing the percentage of credit you use
  • Paying bills and debts on time
  • Limiting the number of hard inquiries your credit report receives

2. Prioritize Your Goals

Have you thought about your financial goals recently? These include both your more immediate needs, and long-term milestones like retirement. Your goals may change as your life circumstances evolve. Perhaps what you envisioned for yourself a year ago no longer applies, but you haven’t set aside time to update your financial plans accordingly.

When you conduct your annual financial check-up, revisit your goals to determine if they still align with your life’s direction or if they need to be adjusted. Your financial plan and saving or investing strategies should reflect your current life circumstances as well as your future needs.

3. Consider Your Values

How you choose to spend and invest your money is a direct reflection of your priorities and personal values. During your yearly check-in, consider your values and how you’re including them in your financial plan. Maybe you’d like to buy more of your household products and clothing from shops with ethically-sourced or locally-produced goods instead of big box stores. Or, you want to include ESG (environmental, social, governance) investments in your portfolio.

Additionally, ask your advisor about charitable giving strategies if you’d like to incorporate philanthropy into your financial plan. Donor-advised funds and charitable trusts can help philanthropic investors make tax-efficient donations to their favorite organizations.

When you feel strongly about a specific cause or belief, it’s essential to align your financial decisions with those values. This not only can give you a greater sense of purpose, but it can make a meaningful difference for others as well.

4. Adjust Savings if Your Income Has Increased

Whether you switched employers, got a promotion, or started a side hustle, your income may have changed in the last 12 months. The question is, have you adjusted your investing and savings strategy to account for this change?

“Lifestyle creep” is when someone’s discretionary income rises, so they spend more on non-essentials or living expenses. While a certain amount of lifestyle change is bound to happen when your salary grows, un-addressed lifestyle creep can be dangerous. It’s remarkably easy to start believing that luxuries or immediate indulgences are “essential” expenses. Suddenly, rather than putting that additional discretionary income into your savings or brokerage accounts, it’s going toward things not serving your long-term goals.

To avoid lifestyle creep, reevaluate your savings and spending each year and adjust to accommodate your salary change. For example, you could use those extra dollars to increase your 401(k) contributions—especially if you benefit from employer matching. You could also choose to put more toward investments, or pay down debt more aggressively. 

As your financial life evolves, it’s crucial to maintain a balanced approach to your spending and saving. It’s healthy and natural to reward yourself for your hard work when experiencing a salary increase, but you also need to not lose sight of your greater financial goals.

5. Review and Update Long-Term Plans

Retirement may be decades away, but it’s always a good idea to check in with your retirement and other long-term plans during your yearly financial check-up.

Assess the performance of your retirement accounts and consider if there’s an opportunity to add more to your 401(k) or IRA, if you haven’t already maxed out your contributions for the year. Retirement savings can accrue compounding interest, meaning the more you contribute now, the more exponentially your money will grow.

Use your check-in as an opportunity to reevaluate your retirement savings goal and timeline to ensure you’re staying on track. If your retirement plan needs adjusting, you may want to speak with a financial advisor about your concerns or questions. Several factors impact a person’s retirement readiness, so talking with a professional can help you cover all your bases before making decisions that could impact your future financial independence.

Another long-term goal to pay attention to is your estate plan. Having a well-thought-out legacy is one of the greatest gifts you can leave your loved ones, and deliberate planning increases the likelihood that it will be executed exactly as you envision it. Each year, review your account beneficiaries, insurance policies, and legal documents—will, power of attorney, medical directive, etc.—and make adjustments as needed. Your estate plan should constantly evolve as your life circumstances change.

6. Seek Professional Guidance

Your financial landscape is vast and complex, meaning it’s best traversed with a team of experts guiding the way. Along with a financial advisor, you may want to include other financial professionals in your decision-making process, including tax professionals, estate attorneys, real estate professionals, insurance agents, and more. While this may sound overwhelming, your financial advisor can help you coordinate and communicate with these various entities.

Not only can your advisor help you establish a tailored financial plan, but they can help you stay accountable and committed to your financial goals. Professional guidance is key if you’re concerned about finding ways to track your progress and prioritize your financial health.  

Your financial health is just as important as your physical health, yet you may not give it the yearly attention it deserves. By checking in regularly, you can take proactive steps to maintain good financial health and address issues that may otherwise impact your immediate needs or long-term goals.

To learn more about working with a trusted financial partner, we encourage you to book a meeting with our team at Abacus today.

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