Springtime may have eluded us this year and skipped straight to summer, but that doesn’t mean spring cleaning has to wait, especially for your finances. The weeks immediately following tax season are an excellent time to look at your personal finances and clean house. Everything from retirement and investment accounts to monthly budgeting and of course – tax planning – could use a check-up to ensure you’re saving where you need to, planning ahead, and making your money work harder for you.
You can use spring cleaning as a reason to clean up your tax records, too. Read our post from April 2017 to find out which tax documents to keep, and which ones to trash.
Before you begin spring cleaning your finances, it’s a good idea to have a plan. Set a goal for what you want to achieve, whether it’s more money in your personal savings or paying off debt. This will help you decide where to allocate your money and keep you focused on the big picture.
Next, look at the “big” accounts: retirement, investment, and if you have children, college savings.
It’s estimated that only about 41 percent of Americans have even tried to calculate how much money they’ll need in retirement. If you’re among the 60 percent who don’t know how much they need, start by figuring out your number. How much you’ll need depends on variables like debt, lifestyle, and spending habits.
This retirement calculator on our partner website, N/L Financial, is a good place to start.
Knowing how much it will cost to retire will help you budget wisely now and avoid making costly catch-up contributions in your 50s and 60s.
Once a quarter, we recommend doing a checkup of your investments. The purpose is to ensure a balanced portfolio that continues to meet your short- and long-term financial goals, be they retirement, college savings, a vacation home, or other large purchase. Start with a self-assessment to make sure your risk and investment funds match your profile. For example, your age, occupation, income, dependents, lifestyle and hobbies, risk tolerance, and so on. Then, make sure your target allocation is on point, and adjust as needed. Don’t be afraid to work with an investment professional if this becomes overwhelming.
To begin with, 2018 is the first year that new tax brackets went into effect. Make sure you know which tax bracket you belong in to ensure your withholding is accurate. Here’s a link to the new tax brackets, which are effective for six years beginning this year, 2018.
Aside from short-term tax planning, you should also start to look at how your taxes might impact retirement income. For example, withdrawals from a Roth 401(k) or Roth IRA during retirement are tax-free, but withdrawals from traditional 401(k)s or IRAs are not (since you pay tax upfront on Roth investment vehicles). In retirement, what tax bracket do you expect to be in? This will help decide how to structure your investment portfolio.
If you have a child or children who may attend college someday, saving for their college fund should be part of your budgeting strategy. There are many different options, which we outlined here in Smart Ways to Pay for College. However, your child or children’s college savings account should not come before your own retirement, ideally. You (or they) can always take out loans for college; you can’t take out loans for retirement.
Other Spring Cleaning Tips
Besides looking at the major categories above, there are other general financial spring cleaning activities to do. These include:
- Shredding old financial documents you no longer need
- Organizing paper and electronic records, and deleting or shredding duplicates
- Consolidating credit cards and bank accounts, closing the ones that are inactive
- Reviewing insurance paperwork to ensure everything is up-to-date, like homeowners or renters, life, auto, disability, etc
What routine do you have to organize your financial life? Share with us at email@example.com or on social media.