Did you resolve to create a financially happy new year? The best day to start is today. A yearly review of personal finances should be a routine for everyone, but it isn’t for most. If that describes you, start at the top of the following nine-step list and work your way through each item to start 2024 on better financial footing.
1. Start at the top — build your balance sheet
First step? Simply make a list of assets and liabilities as of today, so you can track your 2024 progress. Your assets — e.g., your 401(k) plan, investment funds, or home equity — minus your liabilities, such as credit card debt or student loans, gives you a balance sheet and your first 2024 benchmark: today’s net worth. Tracking this 10,000-foot view of your financial situation shows how you’re growing — or not — financially. Make it even more useful by including account numbers, interest rates, and beneficiaries in your personal finance spreadsheet, app, or notebook.
2. Manage your debt to improve long-term opportunities
Understanding the difference between good and bad debt is key to managing your finances and building wealth over time. While some “good” debts can help you acquire or grow assets — such as a new home or valuable college degree that can improve your long-term earning power — most consumer debt, like credit card debt and car loans, simply eats away at your net worth. In the new year, you can improve your finances by first paying down or consolidating high-interest-rate “lifestyle” debts (like dinners out and vacations) and avoid adding more.
Regularly reviewing your credit report can help you understand your debt situation and ensure you’re not a victim of identity theft or fraud. Every year, you’re entitled to a free copy of your credit report from each of the three national credit bureaus, but you can pay for a report anytime. Why not make it a habit to start every year with a fresh look at the data that lenders, insurance companies, and others use to evaluate your creditworthiness?
3. Set goals — and write them down
Many people set health, spiritual, or family goals for the year, and those most likely to achieve them write out their goals. Financial goals are no different. Write down your short-, mid- and long-term financial goals in a goal-setting app, on your calendar, or even on a sticky note. It doesn’t matter where you record them, just that you do.
4. Craft your budget
A budget is simply a plan for your money. Building a detailed budget — and sticking to it — helps you stay accountable to yourself so you can more quickly and easily make progress toward your financial goals. The process is easier than ever thanks to budgeting apps and online tools, but a simple spreadsheet or even a sheet of paper is all you need.
Track your income and expenses and you’ll quickly realize you may be paying far too much for that health club membership you never use and all those streaming services you rarely watch. It can also help you track progress toward goals like paying down debts.
5. Build your safety net
Do you have three-to-six months of cash reserves you can access within 24 hours in case of emergency? According to recent surveys, over half of Americans are one paycheck away from financial disaster on a good day and have no funds to cope with a crisis. If that’s true for you, you should bump this item up on your to-do list.
Cash is important because when you’re already under financial strain, liquidating investment or retirement accounts, or being forced to take out additional loans, may mean paying early withdrawal penalties, fees, and additional interest on a new loan.
Another reason to act today: with historically high yields on cash accounts, you can actually earn some interest while remaining prepared for an emergency. Shop around for better rates on high-interest savings accounts and money market funds that could earn you significantly more interest this year on your emergency reserves. Remember, every dollar counts when it comes to your financial future.
6. Review your insurance coverage
The new year is a great time to revisit your insurance policies. Most people’s needs can and do change from year to year when it comes to protecting your home, auto, and your family’s income and assets. Are you paying for coverage you don’t need anymore? Conversely, are you at risk of loss by settling for state minimums, or opting out of insurance for your paid-for home because you no longer have a mortgage?
Are you paying too much for a permanent insurance policy that won’t come close to protecting your family’s future? A quick chat with an agent may reveal that your biggest life insurance need could be covered with a low-cost term policy.
Do you have an umbrella policy that provides liability protection above the limits offered under your homeowners and/or auto policy if you’re sued? What happens if your normally sweet dog bites the neighbor, or the delivery app driver slips on your icy driveway and gets injured? A periodic review of your insurance policies is a prudent exercise that can pay off in a big way when or if the unforeseen happens.
7. Invest in your future
Once you’ve set your goals, crafted your budget, and banked your emergency savings, commit to maximizing your future opportunities by taking advantage of employer-sponsored retirement plans such as 401(k) or 403(b) plans, or setting up a monthly deposit into your IRA or brokerage account. Now is a great time to revisit your elections or contribution amounts to make sure they align with your goals for the new year.
Do you have college-bound kids? Use a 529 plan or traditional savings and investment accounts, shifting and rebalancing between them depending on how your life, retirement plan, and the ambitions of your children change as you all grow older. And most importantly, make these deductions automatic — if the money never touches your bank account, it won’t feel as if you’ve lost anything psychologically, and you’ll be more likely to achieve your goals.
8. Revisit your beneficiary designations
The new year can also be a good time to make sure you’ve selected both primary and secondary beneficiaries to enjoy your legacy after you’ve lived a long, happy life.
Most insurance, investment, and retirement accounts — including 401(k) plans, pensions, annuities, and insurance policies — allow you to name people or organizations to inherit the account after your death, without the account going through a time-consuming, potentially expensive, and public probate process. Individually named bank or brokerage accounts can also be designated as payable on death (POD) or transfer on death (TOD) accounts to avoid probate.
If you’ve already named both primary and contingent beneficiaries, now’s a great time to revisit those designations, especially if you’ve experienced a major life change such as the birth or adoption of a child, or if you’ve been married, widowed, divorced, or remarried. For example, without an annual beneficiary review, these assets could end up in the hands of a previous spouse, adult children who don’t need the money, or the estate of someone who died before you, rather than your new spouse and small children who may be financially dependent on you.
9. Estate planning is more than just finances
Healthy finances make life easier for you, and smart legacy planning decisions make life easier for those you leave behind.
Beneficiary designations, trusts, and wills help make for a smooth financial transfer after your passing. However, there are additional components to an estate plan that are just as important. If you have minor children, who will raise them if you and your partner pass prematurely? Who will oversee your estate’s funds, and how will they be distributed? What kind of medical care do you want if you can’t speak for yourself? What if you’ve recently moved to a new state where inheritance laws might be different?
If you opt to keep your estate plan private until your death, make sure your executor, trustee, or a trusted family member or friend knows where to find all of your estate documents after you’ve passed to save your loved ones from further uncertainty and anxiety when they’re grieving your loss.
The new year is the perfect time to get a 360-degree view of your finances, which is why so many of us make new year’s resolutions about getting our financial house in order. Remember, personal finance is a journey, not a destination. Regular checkups can help you stay on track and reach your financial goals.
If you’ve reached the end of this list and still have questions, call a knowledgeable friend or family member, or it may make sense to speak to a trusted, reputable financial advisor.
