Looking forward to finish strong financially going into the new year.
As we look to the holidays, our thoughts are often hurried and scattered, trying in desperation to keep pace with plans we have in place: plans for the perfect dinner, plans for fulfilling gift lists, plans to travel to see loved ones. These plans are always made with good intentions meant to help manage the season, but they often fall short of their intended purpose, adding stress and anxiety instead.
Some plans, however, know no season. They hold quiet in the back corners of our minds, serving as reminders of what we truly want, grounding us to who we really are. These plans are often large, achieved in the long-term, and the idea of accomplishing them brings an undercurrent of stability to our turbulent day-to-day.
These plans look different for each of us, but often take shape in shared ideals of contentment. A plan to own a home, for example, can represent the safety and the serenity of a life that comes with it. A plan to retire can signify reward of a lifetime of hard work. A plan for unforeseen events can epitomize a legacy of love for those we leave behind, even when things go off-plan.
Unlike our holiday arrangements, these financial plans are less talked about, but they leave an impact lasting far longer than our seasonal activities. When carefully considered, financial plans like these touch nearly every aspect of what the holidays represent — thanks in times of abundance, care for friends and family, and love passed down from generation to generation. With these ideals in mind, let’s take a deep dive into some gifts that will deliver long after the presents are unwrapped.
“The best time to start financial planning is yesterday,” says Neil Carr, senior private wealth advisor at Hawthorn Bank, “but being prepared around year-end IRS deadlines helps to ensure you’re maximizing your savings.”
With the new year just around the corner, there are a few basic steps that can keep your finances in check and prepared for the future. According to Travis Ford, financial advisor at the Wallstreet Group, those steps can be boiled down to seven actionable items:
1. Create and update your balance sheet.
Do you have a household balance sheet? This is a summary of your assets, debts, and net worth. It’s good to update this quarterly or annually and watch the progress. It’s encouraging to see your net worth increase as your debts go down and your savings goes up.
2. Check your credit reports and scores.
This is something we should all be doing on a regular basis. Monitoring your credit report, which is free, is a good way to watch for identity theft and make sure the information is accurate. Sometimes you may have to pay for your credit score, but it’s inexpensive, and it’s good to know — your score affects your ability to borrow money, get a job, improve your insurance rates, and more.
3. Plan for big purchases.
Do you have a vacation coming? A home improvement? Funding these things ahead of time can lower the stress involved. For example, if your family spends $5,000 on a vacation each year, you can set up a separate checking account and add $300 or $400 to it each month. Then you’ll have less to come up with at vacation time. Similarly, you could add $50 per month to a fund specifically set up for Christmas presents.
4. Increase your retirement contributions.
How much do you put into savings each year? Three percent? Fifteen percent? Ford recommends setting aside at least ten percent of your gross income. This can be daunting for many people, so you can soften the blow by increasing by a percentage point or two each year.
5. Sell investments that are down.
Every year, some investments will do better than others. In some accounts, you can sell the ones that are down and take a loss on your income tax return. This can be fairly complex, so talk to your financial advisor to make sure it’s handled correctly, but if you’re in a high tax bracket, this is often a worthwhile exercise.
6. Plan your estate handlings.
Do you have a will or a trust? Are your beneficiaries up to date? Have you named a guardian for your children if something happens to you? Many people put this off because it’s unpleasant to think about (and there are costs involved), but this is one of the most important steps you can take.
7. Know your required minimum distributions.
If you are over 70, federal law requires you to withdraw a percentage of your retirement accounts, such as an IRA, a 401(k), or Missouri Deferred Compensation. The firm that holds your account will likely handle this for you, but it’s good to have it on your annual list of action items.
Following these simple steps has “given me peace of mind and clarity for the future,” says Jefferson City resident Gary Marshall, CEO of the Missouri Corn Growers Association. “You can never start too early, and finding a professional you can trust to show you the vast array of options out there is very important and will allow you to customize a plan to suit your situation.” As each of our financial circumstances are as varied as the snowflakes of winter, knowing the resources and people available to meet your unique goals is key.
After organizing personal finances by identifying short term spending cuts and creating long term savings goals, you can build an emergency fund — “up to six months of living expenses for an individual, and three months for dual incomes,” says Carr.
Touching on Taxes
In addition to having a small cushion in place for unforeseen expenses, it’s also helpful to know a bit about the fundamentals of governmental tax incentives and how we can benefit from them.
What is a “write-off” anyway? Tax write-offs refer to tax deductions, ways of reducing the amount of your income that is subject to taxation. These are typically incurred expenses that can be subtracted from gross income when calculating how much tax is owed.
“With the passing [in 2017] of the Tax Cuts and Jobs Act, there are fewer deductions available to individuals,” says Jaclyn Abbott, CPA at Abbott and Angerer, CPAs. “However, there are still a few deductions that people can use without itemizing, including student loan interest and up to $250 in classroom expenses for teachers.”
But you don’t have to be mired in student debt or lead a classroom to utilize tax deductions. You can also choose to contribute to an IRA or a health savings account.
IRAs can help anyone save for retirement while providing tax advantages along the way. Contributions you make to a traditional IRA may be fully or partially deductible, and as a bonus, these contributions aren’t taxed until distributed.
An HSA, on the other hand, is a distinctive, tax-advantaged account that can be used to pay for current or future healthcare expenses. When combined with a high-deductible health plan, it offers savings and tax advantages that traditional health plans lack. “An individual with a high deductible health plan can contribute up to $3,500 to an HSA, which is money that will stay with you for life, unlike a flexible spending account,” says Abbott.
While charitable contributions can be utilized as tax deductions, in Missouri individuals can get further benefits by utilizing tax credits explicitly put in place for donations to food pantries. In this instance, it’s more beneficial to take a tax credit that reduces your bill than it is to take a tax deduction that lowers your taxable income.
“If you contribute to a qualified food pantry, like the Samaritan Center here in Jefferson City, you can receive up to 50% of your contribution as a credit on your Missouri tax return up to $2,500. Just remember to keep your receipt for documentation,” says Abbott. Incentives like these make it easier to give back any time of year, but especially during seasons of heavy spending.
As the countdown to the holidays dwindles, our bank accounts don’t have to follow suit. A little bit of forward thought goes a long way in the end. Financial clarity is not only personally liberating, but it also enables us to see how we can meet the needs of our loved ones, find opportunities to give back to our community, and more fully embrace the spirit of the season. After all, isn’t that what the holidays are really about?