2020 has been a tough year and it’s almost over. Finally. But before you celebrate and greet 2021 with your arms wide open, make sure to check these 5 things off your financial to-do list. No matter how excited you are to say goodbye to 2020, it doesn’t mean you should leave money on the table.
Here is my recommended year-end financial checklist:
1.Review your spending and make a plan for 2021
This year has brought a lot of changes in the way we earn and spend money. There is a good chance your spending habits have changed. Now is a good time to review your spending patterns and see where your money is going.
I’m not a huge fan of strict budgets because they don’t work in the long term. However, I like having a flexible spending plan to see how I’m allocating my money between three major buckets – needs (think mortgage payments, utilities, etc.), “future me” (emergency fund, savings, and investments for retirement and other goals), and fun (vacations, another pair of white sneakers, tennis lessons, etc).
This workbook will give you a “big picture” view of what you’re spending on and will help you make intentional adjustments without feeling deprived. The key here is connecting your money to your values.
2.Max out your 401(k) contributions
If your company offers a 401(k) retirement savings plan, take advantage of it and contribute as much as you can.
Your employer may also offer a matching 401(k) contribution. It’s free money to you, so make sure to max that out. Check with your human resources department to see how much you can contribute. Try to save at least the amount that your employer will match. Otherwise, you are leaving money on the table.
Set a goal to gradually increase your contributions each year. Consult with your HR people if that could be done automatically. If you get an annual pay raise, you won’t miss this money from your paycheck.
According to Vanguard, a gradual and consistent increase in contributions to your investment portfolio is one of the most powerful tools to help you achieve your retirement goals. You can’t control the financial markets, but you can control how much you’re saving for your retirement.
3.Review your asset allocation and rebalance your portfolio
2020 has been a volatile year for financial markets, so it’s time to review your investment mix.
Asset allocation is simply a mix of stocks, bonds, cash, and alternative investments in your portfolio. Over time, the value of your investments changes as some asset classes outperform the others on a relative basis. This changes the composition of your overall portfolio.
Rebalancing means getting it back to the original asset allocation. You sell the asset classes that outperformed and buy the ones that underperformed. In other words, you “sell high” and “buy low”. Without rebalancing, your portfolio may become riskier than you realize.
You should rebalance your portfolio at least once a year. Some experts recommend doing it once a quarter. I personally do it once a month or when the market has significant moves.
4.Sell positions for tax loss
Tax-loss harvesting is selling an investment that has lost value in your taxable account to realize losses for tax purposes. These losses can be used to offset taxable capital gains and potentially shave up to $3000 off your ordinary income in the current year.
5.Make charitable donations
As the holidays near, many of us get into the giving spirit. While donating to causes you care about will make you feel good, it’s practical to remember that money contributed to a qualified charity can be deducted from your taxable income. It’s a win-win. So, do good and keep your receipts.
The bigger picture
Most likely 2020 has been rough on your wallet. Now is the best time to make the money moves we’ve discussed to help you get back on track in 2021. Put in the effort now, and you’ll have more to celebrate when you ring in the new year.