2021 Personal Finance Checklist
It is almost time to bid goodbye to 2021. This year there have been some challenges as we continue to recover from the pandemic in 2020. The stock market is regaining its old charm, and we are looking to better days ahead in 2022. Before you plan too many adventures in 2022, it is wise to do an end of year personal finance checkup. Are you sticking to your budget? Are your investments performing well? Are you on top of your estate plan or have there been changes that need to be made? How are your taxes looking for 2021? Here are some tips that can help you in your personal financial management as well as checking with your professional financial advisor if you have questions.
1. Review your budget and savings plan.
Since the onset of the pandemic, lifestyles have changed; therefore, budgets have also changed. Many people work from home which means less money allotted towards auto and gas expenses but higher home electricity and food bills. Looking ahead to 2022, make these budget adjustments. How will you spend differently in the coming year? Any month that you spend less than budgeted, redirect the excess to your savings. Further, can you increase your savings this year?
2. Reassess your financial goals.
In an entire year, things change professionally and personally. Are you saving for your children or grandchildren's college fund but have met your target goal and could now allocate more money towards retirement or savings? Are you wanting to buy a new home in the near future? Are you behind in any of your savings goals? Understand where you are in your goals and alter goals moving forward in to 2022.
3. Analyze your debt situation.
Being debt-free especially if you are nearing retirement age is very important. If you are debt free, you can direct more money to savings and earn more on investments. Reevaluate your debt. How much do you have now compared to the beginning of 2021? If you have not met your goal in paying down your debt, could you cut down discretionary expenses like dining out, subscriptions, etc. in order to put more money towards becoming debt free? You could also increase your income with a part-time business, freelance work, etc.
4. Start tax-advantaged investments.
401(k) and IRA retirement accounts allow you to contribute pre-tax dollars and your money grows tax-free. Make sure you are maxing out your contributions. In 2022, you can contribute up to $20,500 to your 401(k) and persons 50 years and older can add $6,500. For an IRA for those 50 and older, you can save up to $7,000 a year in 2022.
5. Consider Roth conversions.
While Roths do not give tax benefits upfront, they do grow tax-free and withdrawals are tax-free. If you expect to be in a higher tax bracket during retirement, Roths are best suited for you.
6. Rebalance your portfolio.
2021 was a market recovery year especially after the COVID-19 pandemic. Many market changes in the past year might have significantly influenced your portfolio. Conducting a year-end check on your asset allocation is important. Know your risk and evaluate your current portfolio.
7. Reanalyze your tax status.
Did you get a salary increase this past year? Did you receive inheritance? Did you withdraw from your retirement account? It is critical to examine your tax status at the end of each year. There are methods to lower your tax bill such as maximizing your retirement tax-advantaged account contributions, investing in a Health Savings Account (HSA), charitable giving, tax-free insurance plans, etc.
8. Evaluate your insurance plans.
This is an important tip that many people overlook. Usually, you renew your insurance plan annually. Review your policies (home, life, business, car, etc.) to make sure they are still suitable for your case. If you are nearing retirement, do you have health insurance coverage and lifetime care insurance?
9. Stay on top of estate plans.
No matter your wealth status, estate planning is critical for all. Estate planning is for your family after you are gone and also benefits matters when you are alive. Being specific and detailed with beneficiaries' full names, medical directives, guardianship of children, estate distribution, etc. is imperative. See our article in this newsletter titled ‘7 Deadly Estate Planning Mistakes to Avoid’ for more tips.
10. Review taxes.
Taxes are an important component of your personal financial management plan. Each year several aspects can impact your tax status such as an increase or decrease in your salary could change your tax bracket. Another example is that amendments in your retirement account rules could impact your tax liability for the upcoming year.
Use these personal finance tips to help you prepare for 2022. Everyone’s personal financial situation is unique and this is not a one size fits all checklist. It is best to consult your professional financial advisor to best meet your personal needs.
Please contact Brien@TraditionsWealthAdvisors.com or 979-694-9100 if you have any further questions.
Here are seven common mistakes to avoid:
1. Not having any plan. Have you ever had a project you wanted to complete, but procrastination set in? Once completed, you feel a sense of satisfaction. It’s like checking the box on your to-do list. What happens if you die without a will, which is known as dying intestate? For starters, you haven’t legally documented how you want to distribute your assets. If that happens, the courts will determine who gets what, and it will rarely coincide with your intentions. Besides, it can turn into a messy and expensive process if acrimony arises among potential heirs.
2. Set it and forget it. Creating an estate plan isn’t something you set up and forget about. You’re not on autopilot after signing the document. If major life events occur, you should revisit your plan. You may have had additions to your family, a divorce can change the familial equation, or your net worth or assets changes over time. Have you moved to another state? State laws impact how wills are drawn up, and a new address may require an updated legal document.
3. DIY. Doing it yourself with a will won’t cost you much, and there are plenty of online options. But are you comfortable navigating unexpected complexities that may crop up? For example, does the online site fully take the laws of the state where you reside into account? I sometimes like to say, “You don’t know what you don’t know.” Another way to frame it: Do you know the right questions to ask? If not, your will might not have the proper language because it wasn’t written in the correct manner. Saving money on the front end could be costly to your estate if the will you initially prepared hits unintended hurdles.
4. Do account-specific beneficiaries contradict the written intentions in your will? I’ve discussed the need to update beneficiaries, if appropriate. But what happens if a bank or brokerage account lists one beneficiary or beneficiaries and your will names another? For example, let’s say an IRA account at ABC Brokerage has your two sons listed as your beneficiaries split 50-50, but the will explicitly states your daughter as the heir of the account. In this case, your sons will win the battle. Please be sure the wishes in your will line up with the beneficiary forms that are held with your financial institution.
5. Did you forget to fund your trust? There are complexities in setting up a trust and we encourage you to seek a qualified professional, but let’s review one unfortunate mistake. While a living trust can ease the transfer of assets to beneficiaries without going through probate, it’s not enough to simply create a trust. You must transfer assets into the trust. If you fail to fund the trust, the assets you intended to pass smoothly to your beneficiaries won’t pass smoothly at all. Instead, the situation will create headaches and needless legal fees for your heirs. In addition, your assets may not wind up in the hands of the intended beneficiaries, as you thought you had spelled out.
6. Making DIY changes. You know what changes you want. But adjustments executed improperly can lead to unwanted consequences that muddy your intentions. Once-valid legal documents may be inadvertently sullied by do-it-yourself changes that may only be straightened out in lengthy legal proceedings.
7. Planning for your minor children. This is my last point, but it’s definitely not the least important. A major reason for end-of-life planning is not only to properly bequeath your assets after you pass, but to be sure your minor children, if you have any, are taken care of. Be sure to have a guardian in place. Make sure you inform the guardian and receive consent. Spell out instructions regarding financial matters to that person. Too often, the guardian has too much freedom with your money.
Creating and implementing an estate plan will allow your wishes to be carried out when you are no longer here. However, don’t throw up roadblocks that can create complications, delays or even thwart your plans.
If you have any thoughts, and/or questions, contact Brien at Traditions Wealth Advisors Brien@TraditionsWealthAdvisors.com
Sources and further reading
[[https://www.fitzgibbonslaw.com/blog/9-estate-planning-mistakes-and-how-to-avoid-them 9 Estate Planning Mistakes and How to Avoid Them]]
[[https://www.fitzgibbonslaw.com/blog/dying-without-a-will-or-trust-and-the-laws-of-intestate-succession Dying Without a Will or Trust, and the Laws of Intestate Succession]]
[[https://www.forbes.com/sites/bobcarlson/2018/04/20/avoiding-7-deadly-estate-planning-mistakes/?sh=f6938ad61602 Avoiding 7 Deadly Estate Planning Mistakes]]
[[Five Questions to Ask if You Are Named Executor of an Estate https://www.wsj.com/articles/5-questions-to-ask-if-you-are-named-executor-of-an-estate-11634910666]]
[[https://www.ramseysolutions.com/retirement/dying-without-a-will What Happens if You Die Without a Will?]]
[[https://www.kiplinger.com/slideshow/retirement/t021-s014-10-common-estate-planning-mistakes-to-avoid/index.html 10 Common Estate Planning Mistakes (and How to Avoid Them)]]
[[shttps://www.lexology.com/library/detail.aspx?g=35ee7d72-e437-450b-874c-26d516a4c6c3 The Risks Associated with DIY Wills]]
[[https://www.investopedia.com/articles/personal-finance/051315/will-vs-trust-difference-between-two.asp Will vs. Trust: What’s the Difference?]]