Your Complete Year-End Financial To-Do List

As the end of the year draws close, it’s important to take a step back and holistically review your financial picture. This allows you to understand and assess where you’ve been, celebrate successes, and plan for the future. Your finances encompass much more than just your paycheck – it’s also knowing where your money comes from, where it goes, and how you can better manage it, both in the short and long term. Here’s a comprehensive year-end financial to-do list to help prepare you for your best financial year yet.

Budgeting is probably the most dreaded of all financial tasks, but its value really can’t be overstated. If you want to succeed and grow financially, then you have to be readily involved in your finances.

Update your budget categories and amounts

Be sure that your budget continues to reflect your actual income and expenses. Make adjustments to categories and amounts as needed. Perhaps your oldest child moved out or started college. Maybe you changed jobs or picked up a side gig. Even a small change like adding a pet to your family or taking up a new hobby can affect your spending – remember that small leaks sink ships.

If you’re not familiar with the term, a sinking fund allows you to incorporate unpredictable or infrequent expenses into your regular monthly budget as savings. For example, if you know that each year you spend roughly $2000 on gift giving, you would create a sinking fund so that each month (or paycheck) you allocate $167 ($2000/12) or $77 ($2000/26) towards that annual cost. This helps prevent you from scrambling at the last minute to come up with funds, relying on credit, or spending in that category without any form of budget.

Examples of sinking funds could include:

• Vehicle registration fees and repairs
• Pet expenses
• Home repairs
• Birthday, Christmas or other gifts
• Vacation funds

If you prefer to see your money appropriated this way, it’s a good idea to consider a bank that allows you to create multiple “buckets” within one savings account. This makes it very easy to save for specific goals and is an increasingly available option, especially with online only banks. It’s also common to simply open several savings accounts with the same bank to handle sinking funds in a similar way but be careful to understand any fees that may be associated with those accounts.

Tally up your budget categories for the year and see how well you were able to stay on track overall. If you didn’t meet your goals, learn why and where things deviated from your plan. How much were you able to decrease your debt, and how much did your savings grow? It’s important to recognize all of your wins and not shy away from any of your losses.

Beneficiaries can and should be added to retirement accounts and insurance policies (and any other eligible account). The purpose of naming beneficiaries is to direct your assets to a specific person or persons after you die and to do so in the most efficient manner. Having these named persons in place simplifies asset transfer significantly by avoiding the probable process. It can even help with privacy since the probate process is public record.

What if you have a will?

Critically, a will does not supersede beneficiary designations. Why does this matter? Let’s assume you named your first spouse as the beneficiary on your life insurance policy. You then divorce and remarry but forget to update the beneficiary designation to your new spouse. You have a written will naming your current spouse as the recipient of all of your assets and thus assume all of your assets will transfer to her via your will.

Unfortunately, while this will be true for most assets, it is absolutely not the case for your life insurance policy. The proceeds will instead go to the named beneficiary, your first spouse. This is true even if your current spouse is explicitly named for that particular policy in your will. Beneficiary designations come first and are nearly impossible for heirs to contest.

Make sure to look over and reconsider or update any insurance policies you have or may need. Insurance of all types is the way we manage risk and should be included in your financial plan as a way to preserve and protect your wealth.

Housing values have changed drastically over the past few years and your homeowner’s insurance coverage may no longer be enough to protect you. Many people aren’t aware that if your insurance coverage isn’t at least 80% of your home’s replacement value, your insurance company will likely only reimburse a proportionate amount of loss based on what should have been covered. This is critical to understand because it can mean you’re left with an unexpected gap in coverage which can then create financial hardship.

Example: Let’s assume that when you bought your home it was valued at $250,000 and you purchased an insurance policy also valued at $250,000. Now, 5 years later, your house is valued at $350,000 thanks to market changes and improvements you’ve made, but your insurance policy hasn’t been updated. You suffer a $200,000 loss due to a fire.

At first glance this doesn’t seem like a problem – after all, your $250K policy is greater than your $200K loss, right? Unfortunately, that isn’t how the insurance company will see it. Instead they will calculate that you should have had at least $280,000 of coverage (80% x $350K). You actually only had 89% of the required minimum ($250K/$280K) though, and so they will only cover 89% of your $200,000 loss, or roughly $178,000. That leaves you personally responsible for covering $22,000 of the loss.

Other considerations:

• Should your deductibles be adjusted? As your deductible increases, your monthly rate decreases and vice versa. Adjusting this can help with cash flow issues or limit your out-of-pocket expenses.
• Is your vehicle coverage appropriate? If your vehicle is getting up there in mileage, it may be time to drop from full coverage to liability only. It may also be wise to increase your policy limits above state minimums given how expensive vehicle repairs and medical costs have become. This is especially true if you have a new driver in your home who puts you at a higher risk.
• Do you need an umbrella policy? Depending on your net worth, it may be time to secure an umbrella policy to further protect your assets.
• Are you renting? Renter’s insurance offers a high value at a low cost and can protect you from a myriad of issues for roughly $20 per month.

This is a task that’s easy to overlook but is of significant importance. Ordinarily you can request your credit report once per twelve months from each of the 3 major credit bureaus at www.annualcreditreport.com. Due to the pandemic you can now request your credit report from each agency once per week until the end of 2023. The holiday season is an especially great time to check your reports due to the increase in identity theft and fraud.

Your credit score is derived from information on your credit reports. If any information is incorrect, this can lead to increased interest rates, fewer credit opportunities, and even higher car insurance rates.

Click here to read more about how to check your credit report

We’ve seen a huge number of tax law changes since 2018, both temporary and permanent. Because of this, it can be incredibly difficult for someone to predict where they stand in terms of their withholding requirements. There are drawbacks to both overwithholding and under withholding so it’s important to evaluate this periodically so you can either get on track or ensure that you’re remaining on track.

If you don’t have enough withheld, you may be subject to an unexpected tax bill as well as an IRS assessed penalty. If you withhold too much, you’ll receive a refund when you file. This feels nice at tax time but often isn’t preferable since the money could be better utilized throughout the year to manage day-to-day finances. Ideally, you’ll be within $1,000 in either direction.

I manually calculate withholdings for my clients because it tends to be much more accurate, but the IRS withholding calculator can be a great tool as well.

For the self-employed

If you’re self-employed with large income variances, or newly self-employed (including gig workers such as Uber drivers), estimating tax payments is critical to a successful tax filing. In addition to income tax, self-employed workers must remit self-employment taxes of 15.3% on net earnings. That 15.3% goes toward Medicare (2.9%) and Social Security (7.65%) and is only assessed on net income, not gross. The following formulas can help:

Gross income – expenses = net income

(Net income x 15.3%) + (net income x marginal tax rate) = quarterly estimated payment

These are mathematically straightforward but can be deceivingly complex depending on your overall tax situation. If you’re at all concerned about determining the proper estimated payment amounts, please set an appointment for a tax planning consultation.

Flexible Spending Accounts (or Arrangements) allow you to defer income on a fully tax-free basis (including FICA taxes) for medical spending. In the case of Dependent Care accounts, the fund can be used toward child care costs.

This arrangement is similar in some ways to a Heath Savings Account or HSA, with one significant difference: funds do not carry over from one year to the next. FSA’s are “use-it-or-lose-it” plans with few exceptions.

If you still need to use up remaining funds, the FSA Store has a great list of eligible items, many of which can be purchased over-the-counter. Cold medicines qualify, as do first aid kits and pregnancy tests.

Depending on your overall financial picture, you may not be able to max out your 401(k) or similarly tax advantaged retirement account (and that’s okay!). However, there are significant benefits to contributing as much to them as you can. First and foremost, the money you put toward your retirement becomes part of your retirement. This is an obvious statement but it’s worth pointing out explicitly because of the natural tendency to think of income deferral as a short term loss rather than the long term gain it actually is.

Here are two great reasons to contribute to your 401(k) before the end of the year:

1. Your company provides matching contributions. Think of this as an opportunity to earn additional income. Rather than earning that income via hours worked, you’ll earn it via salary deferral instead.

Like the majority of investors, you probably experienced more losses than gains this year and your portfolio may be down overall from last year. Most people are happy when the market is up and less happy when the market is down – that’s to be expected. However, if your losses led to lost sleep, consistent stress, or if you spontaneously sold investments despite previous plans, you need to revisit your asset allocation.

Your asset allocation should be in alignment with your risk tolerance and risk capacity. If you’re a conservative investor with plans to retire soon, it doesn’t make sense to be heavily invested in equities. Conversely, if you’re young and willing to take on more risk, then it wouldn’t make sense to be heavily invested in bonds and fixed income assets.

It’s important to understand this concept so you’re comfortable with your portfolio regardless of market swings. Once you know the allocation you are comfortable with – for simplicity’s sake, let’s say 80% stocks and 20% bonds – you’ll want to rebalance your portfolio at least once per year. Rebalancing means selling some stocks and buying some bonds, or vice versa, so that your portfolio’s asset allocation remains in alignment with the amount of risk you’re comfortable taking.

For example, if bond returns are poor and stocks perform well throughout the year, your allocation percentages will shift. If you begin with an 80/20 allocation, you may end the year with an 85% in stocks and only 15% in bonds. This would leave you in a riskier position than you intended.

If you have actively managed investment funds, this task is already included in your management fees (or should be). If you self-manage any investments, you’ll need to perform these actions yourself.

This is an easy but tedious task that we often ignore unless prompted. Although passwords aren’t directly related to finances, if the wrong ones are compromised then they definitely can be. Protect your privacy and your accounts by updating your passwords regularly, even if you don’t technically have to. Using a password manager can reduce the need for memorization, making it easier to utilize stronger passwords for your accounts.