Helping Your New Year's Resolution
If you made another New Year's pledge to straighten out your finances, we are here to help. This month we offer you a financial planning calendar. Simple- one task per month will move you a long way towards your goal.
January - Review Your Investment Strategy
This starts with looking at your asset allocation to determine if it still fits your financial position and time horizon. It is also a good time to rebalance your portfolio so that it actually follows your planned asset allocation.
February - Review Beneficiaries
Use this month to check beneficiaries on your IRA accounts, qualified retirement plans at work and life insurance policies. Also review the beneficiaries in your will and any trusts to make sure they reflect your current family situation.
March - Review IRA/401(k) Contributions
IRA's and 401(k)'s are generally the best vehicle for retirement savings. March is a good time to make sure you maximize your previous year's IRA contribution or if you didn't maximize your 401(k) contribution in 2011, adjust your monthly contribution so you do hit the max ($17,000 in 2012 for most of us) this year.
April - Update Your Emergency Fund
You should always have 6-12 months of monthly expenses in reserve in the case of an emergency. If you don't have one, start funding one right away. If you already have a fund use this time to review if it is adequate given changes in your cash flow over the previous year.
May - Determine Your Effective Tax Rate
Your effective tax rate is the percentage of your income that actually went to taxes in the previous year. It is calculated by adding up your total tax you paid to the federal (including payroll taxes), state and city governments and dividing that by your total income plus any 401(k) and IRA contribution. This is a good number to know because it lets you know how much of your income is actually available to you.
June - Determine Your Marginal Tax Rate
Your marginal tax rate is the percentage of the last dollar you made that went to taxes. It lets you know how beneficial tax shelters (such as 401(k) contributions) are to you. Ask your accountant, or look at your 'taxable income' (line 43 on your form 1040) then look up the tax bracket for that income. You will need to do the same for your state return. Add those two percentages and you will get your marginal tax rate (it is a little different if you are in the AMT). You can find federal and state tax brackets here:
July - Determine Your Total Assets
These are the things you own. This includes personal assets such as a home, car and jewelry. It also includes intangible assets such as bank and brokerage accounts. This month, collect all your statements and estimate fair value for your tangible assets. Use a spreadsheet or this Net Worth worksheet.
August - Determine Liabilities and Calculate Net Worth
Your liabilities are the amounts you owe. They include mortgages, credit card balances and student loans. The Net Worth spreadsheet link above can help you here as well. Once you calculate your total liabilities, subtract that number from your total assets to calculate your net worth.
September - Cash Flow
Cash flow consists of income and expenses. Most people know their income but determining expenses takes some legwork. We recommend looking at three months of expenses to get a better feel for this number because not all expenses occur every month (think insurance payments). Using one debit or credit card for most of your expenses will help you keep close track of your expenses and many banks will provide a breakdown of expense categories (forewarning: food has become really expensive).
October - Calculate Personal Financial Ratios
The two primary ratios you should worry about are your Savings to Income and Debt to Income. You want the first to be high and the second to be low, but also focus on the direction over time. This article on personal financial ratios can give you a general target based on your age.
November - Review Insurance Coverage
Take this month to review your protection against financial threats. In particular, examine your auto and home insurance limits to make sure they will cover the replacement value of the asset. Make sure you have adequate liability coverage on top of the basic insurance. Also, review your life insurance policies, particularly if there have been any additions in your family over the last year. Also, review benefits available to you through work to see if you should be taking advantage of them at the next enrollment period.
December - Tax Loss Harvesting
At the end of the year, see if it is possible to offset any gains you have throughout the year by realizing a loss. Remember, even if you have no net gains you can use $3,000 of your losses against your earned income.