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Organize Your Finances for the New Year
A new year brings a chance to start fresh with just about anything. If your midnight toast included a resolution to improve your financial health, here’s how to make it happen.
Don’t worry if your finances aren’t perfectly organized. Take the time now to gather all the information you need, sort it out, and create a plan to move forward. You’ll want to round up any money related information and documents you have, especially statements for any bank, credit union, and investment accounts. Be sure to include documentation for income, like pay stubs or tax forms, and debt such as loans and credit cards. Think about all the ways money flows in and out, and account for all of it. It may take some time and effort to get the information you need, but once you have it, you can fully understand your own personal situation. Better still, you’ll have peace of mind knowing exactly where you stand financially and have a plan to move forward.
Get on a budget
To get ahead, it’s important to know where you stand and to create a plan with realistic goals such as a comfortable retirement, education and home ownership. Budgeting may sound old-school, but it’s still one of the best ways to accomplish this. If you already have a budget in place, you’re on the right track, and this organizing process will help you fine-tune your spending and savings. If you don’t currently have a budget, getting a clear picture of your finances is a great first step.
Prepare for the unexpected
Life can throw you some scary curveballs. Challenges like job loss, medical issues or property damage can leave you drowning in debt for years if you’re not prepared. That’s why it’s essential to build an emergency fund that can cover at least three to six months of living expenses. Even if you can save only a little each month, with consistent deposits and compound interest you can eventually grow a sizable protective cushion.
Break free of debt
Making just the minimum payments on major debts means you’re paying mostly interest and barely even chipping away at balances. One effective approach for eliminating debt is to concentrate your efforts on your highest-interest balance first, while still making timely smaller payments on all other obligations. Once this first debt is paid off, focus on the most expensive remaining balance, and continue this way till you’re debt free.
When multiple debts are truly out of control, debt consolidation may provide some relief. This makes it easier to pay off debt faster and more affordably by streamlining multiple debts into one single lower monthly payment. Debt consolidation options include home equity financing, personal loans and zero-interest credit card balance transfers.
Maximize tax deductions
Researching tax deductions and gathering appropriate documents can help you avoid paying more tax than absolutely necessary. You may qualify for tax breaks including:
- Interest deductions for mortgages, home equity financing, business financing, student loans and loans for boats with living quarters.
- Deductions for other taxes paid, including sales tax, foreign taxes and self-employment tax.
- Home office and business insurance deductions.
- Deductions for monetary and nonmonetary charitable gifts.
- Pre-tax contributions to traditional IRAs and 401(k) plans.
- Lifetime learning credit.
Re-evaluate your investments
Life conditions change over time, so it only makes sense that investment and retirement accounts should be adjusted periodically. In early years, it’s beneficial to favor an aggressive mix of securities, but as retirement approaches, gradually shift toward more conservative choices like bonds, certificates, and mutual funds. It’s also smart to examine your estate plan and make sure your will, insurance policies and beneficiaries are up to date.
Financial housecleaning kicks off the new year just right. Over time, things that seemed out of reach become affordable, and every unexpected expense won’t seem like the end of the world. This change may be gradual, but by the next New Year’s Eve toast your improved financial wellness will be something to celebrate.
