How to Spring Clean Your Finances

1. Literally Clean Out Your Old Stuff: Stop shuffling, and start decluttering. Go through every room, closet, and storage space with a fine-toothed comb. When in doubt, throw it out, sell it, or give it to someone who could use it. Separate your outgoing items into three piles: sell, donate, and trash. You’d be surprised what people will buy. There’s a market for your old cell phones, computers and other electronics, clothes, furniture, and children’s belongings. Sell these on Craigslist, eBay, or Etsy to recover some of your initial cost.
What you can’t sell, donate to a charitable organization. Make sure you keep your donation receipts in case you decide to claim a tax deduction for charitable giving. You’ll need to itemize each of these deductions come tax time.      
   
2. Clean Up Your Paperwork: Keep all of my important documents digitally. Back them up through two systems: an automated cloud backup service that constantly uploads your files for secure off-site storage, and an external hard drive that you can keep at home. If your laptop stops working, critical documents won't be lost.

Make your file storage digital to be more organized and cut down on clutter. Borrow or rent a scanner if you don’t have access to one already to make the transition painless. For any original documents you simply can’t bear to part with, put them in a portable, fireproof safe. If something isn’t valuable enough to justify space in your fireproof safe, then it isn’t valuable enough to keep as a hard copy.

3. Set (or Check Progress on) Financial Goals for the Year: When you’re clear on your long-term financial goals, you can then work backward to set mid-term financial goals over the next two to five years and short-term financial goals for this year. For example, a long-term goal to reach financial independence within the next five years sets a target accordingly for net worth and passive income by the end of this year. 

Your financial spring cleaning offers a perfect opportunity to check in on your progress. You can tweak and adjust your spending, savings, and investments as needed to put yourself on track for hitting your short-term targets for the end of this year.

4. Review Your Monthly Budget: Reframe how you look at budgeting. Instead of thinking in terms of sacrifice, think in terms of prioritization and intentionally designing your perfect life based on what’s important to you. Instead of taking two years to save a down payment to buy a home, for example, you could probably do it in one if you cut $500 or $1,000 in monthly expenses. Would you rather spend $100 per month on cable TV or save your home down payment faster? The same goes for spending money on new clothes, gadgets, eating out, and any other discretionary expense. Put even “necessary” expenses under the microscope.

5. Cancel unused or unnecessary subscriptions: List every single subscription you pay for, whether monthly or annually - video and music streaming, gym memberships, box subscriptions, landlines, antivirus software, hard drive backup services, etc. After you have a list of your subscriptions, apply a simple litmus test: Do you use this subscription multiple times a week, and does it make your life noticeably better? For instance, if you’ve been to the gym 10 times in the last month, that likely justifies keeping your membership. But if you’ve been once or twice, cancel your membership and switch to home workout routines instead.

6. Plan & Budget for Remaining Irregular Expenses This Year: Irregular expenses are the fly in the ointment of most people’s budgets. No one forgets to budget for their rent or mortgage payment. But most people forget to budget for wedding, birthday, shower, and holiday gifts, for example. Just because these expenses don’t pop up every month, that doesn’t mean they don’t cost you money and eat into your budget. So set aside money  and earmark this account for irregular expenses. You should also budget for travel expenses. You will probably go on at least one vacation this year. Plan what you want to spend on these and other irregular expenses for the rest of the year, and set aside money accordingly.

7. Plan Your Retirement Contributions: Whether you want to max out your IRA or 401(k) or just take advantage of matching contributions, now is a good time to plan out how you’ll achieve your target retirement savings this year. Again, these contributions don’t just happen — you need to budget for them carefully.

8. Adjust Your Tax Withholding (if needed): Withhold too much, and you give Uncle Sam an interest-free loan. Withhold too little, and you get hit with IRS penalties. Aim for a $0 tax bill come April 15th (or May 17th this year) and adjust your income tax withholding with your employer as necessary. A consultation with a tax professional would likely be helpful.

9. Review Your Health & Life Insurance Policies: Your health insurance and life insurance requirements evolve as you get older. Someone with a spouse and children likely needs more life insurance than an unmarried person living alone. Research how much life insurance you need, if any, before talking to a sales rep.

Also, consider opening a health savings account (HSA)  in combination with a high-deductible insurance plan. In addition to the low premiums, you can benefit from the unique triple tax benefits of an HSA.

10. Automate Your Savings: One way to automate your savings is splitting your direct deposit to go into not just your checking account, but also a savings or investment account.

You can also set up automated recurring transfers to take place every payday. For example, you could set your mortgage payment to go out automatically each month and pay more than the minimum payment if you want to pay off your mortgage early.

By automating good behaviors like saving money, you ensure they actually happen. Plus, automating your savings offers a great way to trick yourself into saving more because it takes the temptation out of spending. With less money calling to you from your checking account like a siren, you simply adapt to spending less.

11. Review Your Asset Allocation: Your ideal asset allocation changes over time. As you get closer to retirement, you should start easing away from stocks to avoid sequence of returns risk. In their place, you should gradually opt for more stable, income-oriented investments, like bonds and lower-risk real estate assets.

Your asset allocation also drifts on its own over time as certain investments in your portfolio outperform others. You need to periodically review your portfolio, even when you don’t plan to change your target asset allocation, so you can rebalance your portfolio to return to your target.

12. Create a Simple Monthly System for Tracking Key Numbers: There’s a saying in the business world: “That which gets measured gets done.” In practice, it means you should determine the most important tasks and indicators of progress, and track them regularly.

Create an extremely simple spreadsheet to track your own financial progress each month. If it takes you more than five minutes to do, you will end up blowing it off.  Start by picking just three numbers: savings rate, investable net worth, and FI ratio (financial independence ratio or FIRE ratio).

Your savings rate is the percentage of your net income that you save each month.
Your net worth is the sum total of all your assets, minus your debts and other liabilities. You don’t have to manually calculate this yourself each month. Use a free tool like Mint.com or Personal Capital to track it for you automatically.

Finally, your FI ratio is simply the percentage of your monthly living expenses that you can cover with passive income from investments. If you live on $4,000 per month and you have $1,000 in monthly passive income, you have a FI ratio of 25%. The higher your FI ratio, the faster you can reach financial independence.

Create your own system for tracking your key financial numbers, and make sure it takes no more than five minutes of work each month.

13. Review Your Credit Report for Errors: The credit bureaus make mistakes all the time. According to the Consumer Financial Protection Bureau, one in five Americans has an error on their credit report. Luckily, you can check your credit report for free once a year from each of the three main credit bureaus. Your financial spring cleaning makes a great time to pick through your report and look for errors. If you find any, you can follow the simple process of disputing credit report errors. It’s free and requires little effort on your part.

Final Word:
A clean home and clean finances don’t happen by mistake. They only happen when you go out of your way to make them happen. Set aside some time this spring to review your finances and tweak them where necessary.

​If you need help with your financial spring cleaning, contact Brien at [email protected] or [email protected]