As Christmas approached, did you find yourself getting a little nervous about the financial side of the holiday? Keep your spirits up by using the down time at the end of the year to do a little planning that will reap years of benefit to your peace of mind and financial health.
The idea of this list is to promote thinking seriously about getting your financial house in order. Apart from identifying strengths, it can help uncover areas to work on as you build your financial security. Consider this list as you set priorities for the coming year, and beyond, to set yourself up for future financial success.
- Do you check your credit report once a year? Doing so will alert you to possible errors that could negatively affect your credit rating or potential identity theft activity, such as unauthorized credit card applications. A check of each report from the three major credit reporting agencies can be done at www.annualcreditreport.com.
- Do you have a written family budget? If not, developing a spending plan will give you knowledge about where your finances go, and direct them to the places of highest use.
- Do you have written financial goals, with time lines? Goals help you accomplish your vision by breaking it down into doable components. Setting deadlines helps make sure that you stay on track.
- Do you know if you’re making progress on your financial goals? The single most useful number to track to see if you are increasing your personal equity over time is your net worth. A net worth statement measures your wealth (all you own less all you owe) at a single point. Preparing one at tax time is convenient, because you are thinking financially, anyway.
- Are you saving at least 10 percent of your gross income? It's a habit to get into, like tracking your expenses and budgeting for the future.
- Do you have an emergency fund? A cash reserve of about three months salary will help smooth income fluctuations and provide protection.
- Are you contributing to your employers’ 401(k) retirement plan? If your employer offers a retirement benefit, be sure to take advantage of it. Employers match part of your 401(k) contributions, so don’t turn down this free cash.
- Have you set up and started contributing to an individual retirement fund, such as a traditional or Roth IRA? If you’ve got the money, there is no reason not to invest in an IRA. It will build wealth long term by combining the power of compound interest and tax savings.
- Do you have health insurance? Even young adults get seriously ill or injured, and the debts could ruin your financial health for years, even decades, to come.
- Have you considered life insurance? Life insurance is useful for those financially dependent on you: a spouse, kids, a sibling or parents.
- Do you have insurance to cover other large expenses? Renters or home owners, among the many types of insurance available, can come in handy.
- Are you protected against disability? A few possible tools are revocable living trusts, disability insurance and Social Security’s disability coverage.
- Have you paid SE taxes enough quarters to qualify? Self-employment tax (SE tax) is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.
- Do you have a will? A will ensures that your possessions and financial assets go where you want them to go if you die unexpectedly young. It also provides for the care and guardianship of your young children.
- Have you prepared advance directives? Advance directives are legal mechanisms that allow somebody to act on your behalf if you are unable to do so. These cover important quality of life issues. Durable power of attorney designates someone of your choosing to take care of your finances in the event you cannot. Health care power of attorney designates someone of your choosing to take care of your health care decisions in the event you cannot. A living will ensures that you get the medical treatment that you want if you're terminally ill or in a permanent coma.
- Do you have an important papers file? Organizing your personal finance and other important paperwork into a file with appropriate folders will make the information accessible for your own record keeping, as well as if something happens and another person must manage your finances or settle your estate.
- Do others know where to find your important financial documents? Who are your advisors? Make sure another person knows who to contact and where things are if they have to step in and manage your affairs or property for a time.
- Have you estimated how much money you need to retire comfortably? Calculators are available at www.choosetosave.org/ballpark.
- Have you estimated how much money will be needed for your children’s college and how much must be set aside each year? Possible tools include 529 plans, U.S. Savings Bonds, etc.
- Are your investments diversified? Relying on only one type of investment, such as agricultural land or stocks in one sector (such as energy) doesn’t protect against risk.
- If you’re in a family business, do you know what form your investment in it will take? If working with others, are the expectations for ownership clear?
- Are plans in place for the transfer of management and ownership of family business assets in a multi-generation operation? Is there a time line for the transfer? Is this plan well communicated amongst family members and stakeholders? Is the plan written down?
- Are you continuing to invest in your education? Even if you've finished school, studying and training throughout your career is the best financial investment you can make.
- Do you talk over your finances with your spouse? Financial conflicts – not low income – are a major cause of divorce. Be honest about your personal finances, including debts. Talk about how you view money (Are you a spender or saver?), your financial aspirations, how household money will be managed and how assets should be titled.
- Have you paid off credit card debts? Debt is an albatross that stymies other financial moves. If you have high-interest debt through credit cards, auto loans, education loans or some other loan, pay it off as quickly as you can – you surely have a better use for your money than paying interest. With credit cards, pay more than the minimum, or better yet, pay your card off each month. This establishes good credit for major purchases such as autos, homes and other property.
What would you add or subtract from this list? There are many things to consider, and some will jump out as much higher priority items than others – including some that aren’t on this particular list. You might consider the items here to be things to get started with as your journey to financial security in later life develops. So the final question is: What are you going to do next?
Cole Ehmke is an extension specialist in personal finance at the University of Wyoming in Laramie.