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The Every-Year Financial To Do List

New Year’s Resolutions are overrated and come with a very high failure rate. Let’s try something different; how about the mid-year financial checkup? As a Certified Financial Planner™ (CFP®), I have a very long list, both mentally and written, on what I am looking for when it comes to opportunities and pain points when reviewing a client’s current financial plan. In this post, I want to walk you through the “Every-Year Financial To Do List.” You don’t need a CFP® to do these ­– you just need to remind yourself to do it! So, head over to your calendar and add a recurring event for every year on today’s date. 

Increase Your Savings

I know what you’re thinking, “Oh great, thanks Chad. This is Noble Peace Prize level work you have provided.” Hear me out. Every year, you can expect to get a pay increase of some sort to keep pace with inflation. While it may be small, say 2%, you can still take advantage of that. If you get a 2% raise for the year, increase your employer retirement plan (401(k), 457 or 403(b)) by 1%. 4% raise, increase by 2%. 6% raise, increase by 3%. And guess what, you will still have more take-home pay!  

Even if you don’t get a raise this year, increase your retirement plan by 1%. You will hardly notice the extra savings from your paycheck, and it should go a long way in helping with your retirement. 

Pro-Tip: Always make sure you are saving enough to get the full match from your employer.

Pro Tip: The long-term savings component is often neglected, especially for those where it may seem like it is a long way off. It is vital to remember that the sooner you begin to save for retirement, the more your money will grow due to compounding interest

Pro-Tip: Automate! Set your 401k to automate both your current and future contributions. For example, let’s say you are currently contributing 6% to your 401k. If your plan allows for it, set auto-contributions to add 1 or 2% each year automatically. So next year, your 6% will increase to 7% and then 8% the following year, and so on. 

Pay Down Debt

Interest rates are starting to rise now, and this will increase any debt payments you have tied to a variable rate. If your credit cards are building a lot of debt, it is a sign that you are living beyond your means. Bad debts are credit cards, car loans, and personal loans/home equity used for bad things. While I dislike the term “good debt,” your mortgage and student loans (assuming they are organized and on the good path forward) are okay for now, if you have current bad debts. However, if you have no bad debts, it is fair game to discuss the idea of paying extra on your student loans and/or mortgage. 

Two types of debt strategies

APR Snowball: Start with higher interest debt and begin applying more each month to it until you have paid it off; you can then snowball that amount into a payment towards another portion of your debt.

Psychological Snowball:  Same idea but instead of the higher interest rate, you would start by paying off the lowest balance first, and then snowball that amount into the next debt balance. From a numbers standpoint, the “APR snowball” strategy is smarter; however, as humans, the psychological benefit of paying something off can invigorate you to keep the momentum going. 

I don’t care how you pay them down and off, but just do it! 

Credit Cards Tips 101: Yes, your credit cards should be paid off each month. However, I want to add a few more important ideas that seem to be missed in the credit card world. First and foremost, use a credit card that gives you the rewards you want the most. Cashback is always great, but if travel is your thing, get a great travel reward card. 

Next, you should not need more than 3 credit cards at most. I don’t care how much you like the “discounts” at Lowes, Home Goods, Bass Pro Shop, you need 2-3 cards and none should be linked to a retailer (unless you really love, Home Goods, Bass Pro and Lowes rewards and use no other cards). 

If you have not done so, call the credit card provider and ask them to lower your APR. If you have a good history and keep a $0 balance month-to-month, you have a very good chance of getting a lower APR. 

Last but not least (DISCLAIMER: If you carry a balance from month to month, do NOT do this right now), ask the credit card provider to increase your credit limit. This one is pretty simple and is usually granted. Personally, I do this a few times per year. Almost one-third of your credit score has a very large effect on something called your “credit utilization ratio.” This accounts for 30% of your credit score. Simply put if you have a credit limit of $5,000 and your balance is higher than $1,500 (more than 30% of your credit is being utilized), you are likely hurting your credit, even if it’s paid off each month. A simple fix is to increase the amount of credit available to you, which in turn lowers your credit utilization ratio.

Build Your Emergency Fund

You should have enough to cover at least six months’ worth of living expenses. The easiest way to do this is to automate your savings. As soon as your paycheck comes in, automate $50-$100 to transfer to a separate account for your emergency fund. Make sure you are using a separate account, so you don’t commingle your bank accounts.

Pro Tip: Stop getting ripped off by your bank! Earning .0000001% is not helpful and you are technically losing money every year in the form of purchasing power. Go find an online bank that is offering over 2% and get some interest. 

Pro-Tip: If you want to add another psychological barrier, hold your savings/emergency fund at a separate bank. When your checking and savings are held at the same bank, you know you have easy access to your savings accounts. However, if that is held at a separate bank, you know it takes 2-3 days to move money and it also requires a few additional clicks.  

Pro-Tip: Make sure you have good bank accounts for your checking and savings accounts. Yes, the interest rate is important but make sure you are not paying absurd fees, minimum account fees, or whatever senseless fees the banks think of next. If you have a $1,000 balance and pay just one $5 fee in that year, you likely just removed any interest you will receive for the ENTIRE year. $5 on $1,000 is a .05% fee. As of today (6/2019), this is about 5x the interest rate of most brick & mortar banks. 

Pull Your Free Credit Report

There are two major components to your “credit”: your credit score and credit report. The credit score gets more attention because it’s a simple three-digit number. Your credit report is a bit more overwhelming because it is numerous pages filled with all your credit accounts, history, balance, inquires, etc.  

Your credit score is a significant part of your overall financial health. A good credit score can help you get lower interest rates and allow you to borrow money when you need it. Having a poor credit score can cause you to pay significantly higher interest rates and sometimes even prevent loan approval. It is not only important to practice good credit score habits throughout the year but also to check out your full credit report at least once per year. You may find items that need to be corrected or at least know areas that you will need to continue to work on to maintain or improve your score. A small increase or decrease in a credit score will lead to a small increase or decrease in an offered interest rate. That “small” interest rate difference can lead to a large total cost difference over the full duration of the loan. 

For example: On a $400,000 30-year mortgage, at 4% your total interest paid is $287k. At 5.5%, your total interest paid is $417k. So, while 1.5% may seem small, it leads to an extra $130k in interest payments. 

The main goal is to make sure everything looks good. I know it can look overwhelming, but it is not as complicated as it seems. Here is a good resource on how to read a credit report.

Also, don’t assume that your credit score is the only vital information out there, you should still take some time each year to review your full credit report. It’s also important to screen your credit reports regularly to keep an eye out for possible identity theft and fraud.

Pro-Tip: Pull your free annual credit report from AnnualCreditReport.com.

Pro-Tip: Pull your credit score from myfico.com which is your most accurate option, but it does have a small fee. Most credit cards today offer a free credit score monitor which is also an option, we also know that many like to use Credit Karma to get a free credit score check and to monitor. 

Shop Your Homeowners & Auto Insurance

Policygenius did a survey and it found that one in three Americans with homeowners and car insurance NEVER shopped for better coverage. The main deterrent was that they think it will take too much time. The crazy fact was that once individuals did shop, 42% made a switch! 

Today, the internet makes everything easier. What are the steps to get started?

  1. You should always shop homeowners and car insurance together, as most insurers will have a bundled discount. If you have an umbrella policy and/or personal articles policy, include those as well in the quote. 
  2. Make sure your coverages and deductibles are in line. For many, we think a $500 or $1,000 deductible is fine (assuming your emergency fund looks good). Why? Well, how many claims have you had on your car or home? Probably not too many. Increase your deductible, add solid coverage, and save a few bucks.
  3. Ask questions. The fine print on insurance contracts is a foreign language. It is okay to ask questions and ask for the details. What does replacement costs mean? What happens if water backups from the main street line? What are endorsements, and do I have any on my policy? What is covered if my car is in an accident or gets damaged?
  4. Bring in an expert. Look for an independent insurance broker who can shop numerous companies and explain the pros/cons to each. 

Review Beneficiaries

This one is as simple as it sounds. Take some time each year to review your beneficiaries. Has anything changed, did the family grow, are you mad at your siblings? Whatever the case, review your beneficiaries because once you’re gone, you can’t fix it. 

Review your life insurance (both private and work plans), your qualified investments (IRAs, Roth IRAs, 401ks, SEP IRA, SIMPLE IRAs, 403b, 457b, etc.) and even non-qualified accounts (banks accounts, accounts with “TOD (transfer on death)”, etc.). 

Revisit Your W4

If you continually get a large tax refund every year, you should reevaluate your W4. Your W4 is the document that tells your payroll provider how much to withhold for Uncle Sam. The time value of money has taught us that a dollar today is worth more than a dollar in the future because of inflation and interest rates. Especially when the interest is 0% from the federal government. 

For example, if you received a tax refund of $4,000, you missed out on approximately $153/per paycheck. If you updated your W4 and invested the $153/pay and earned .23% bi-weekly (6% per year = .23% bi-weekly or 6/26), you could have had $600,000+. Yep, let that one sink in (mind = blown)! 

Every Few Years

Complete/review your estate documents: The excuse, “I am too young and don’t need that yet” does not work here. We have clients in their 20’s who get these documents completed before their parents, which is not a good thing if you’re the parents.

Everyone needs to have the vital four: Will, Living Will, Healthcare Power of Attorney and Durable Power of Attorney. If you have minor children, make sure you appoint a guardian as well! I won’t bore you with what they all mean – we will leave that to your attorney. Depending on your situation, revocable trusts can also be a good addition. 

Investigate refinancing options: If you purchased your home or vehicle when loan rates where higher, consider investigating what it would cost to refinance these items at a lower interest rate. Even if interest rates have not decreased significantly, but you have seen a jump in your credit score since you made your purchase, the interest rate you might be approved for could help reduce your monthly payments while eliminating some of the interest that you would otherwise pay.

There you have it, now make sure you block a few hours once per year to go through your new every-year to do list. 

Written by Chad Chubb, CFP®

Disclosure: This information is for general purposes only. This information is not intended to be a substitute for specific professional financial or tax advice, as individual circumstances vary. Please see a financial professional in regards to your own individual situation.