Have You Conducted Your Yearly Financial Checkup Yet? Here’s a Guide

Estimated reading time: 7 minutes

The beginning of the year is often a perfect time to look at your finances. The fast approaching tax deadline is an obvious incentive. While working on your tax return, you’ll have to look at what you earned in salary, interest, or dividends, how much you spent, and what you paid in mortgage interest or property taxes the past year.

Doing this research and calculations will serve you well long after you have filed your 2018 tax return. Once you have reviewed your finances and investments, use this as an opportunity to look forward and revise them. This sets you up to take the right steps today to build a strong foundation for your financial wellness.

Review Your Finances

The big question here is, are you spending more than you earn? In accounting terms, this is called a profit-and-loss statement (P&L). There are plenty of accounting software packages on the market (read reviews from PC Magazine) to help you create a P&L, or your bank may offer reporting tools if you use its online bill-pay services.

Here are some of the elements you may want to incorporate:

1. Consolidate all your income sources to arrive at your total income. Be sure to include all sources of income, including:

• Salary
• Payments from rental property
• Social Security or other government benefits
• Pension or annuity payments
• Retirement plan distributions such as required minimum distributions
• Interest or dividends earned on bank accounts and investments
• Self-employment income
• Miscellaneous: jury duty stipends, rewards earned on credit accounts and taken as cash

2. Write down all your expenses. Unless you are in the habit of writing down everything you spend (Not a bad habit!), you may have to spend some time drawing up a list of your expenses. It can help to start your list by thinking in categories. For example:

• Fixed household expenses: mortgage or rent payments; utilities; groceries; phone; cable; insurance;
• Other fixed expenses: automobile (payments, insurance, gas, repairs); transportation (public transit fares, taxis or Uber, parking); school tuition; credit card and other loan payments; contributions to your 401(k) and IRA
• Health care costs: insurance premiums; co-pays; medications and other items paid for out-of-pocket
• Fixed personal expenses: gym, museum, and other memberships; clothing (purchases and upkeep); subscriptions
• Discretionary expenses: restaurant meals; your morning lattes or after-work beers; travel; movies and other cultural excursions; charitable donations
• One-time expenses: this is a useful category for things like plumbing repairs, household renovations or big purchases that you don’t make every year

The bottom line—subtracting your expenses from your income—will tell you if you made a profit (are in the black) or a loss (are in the red). With this information at hand, you are ready to adjust your financial picture.

Revise Your Finances

This is the budgeting element of the process. You have choices to make, whether you are in the black or in the red.

1. If you spent more than you earned, take a hard look at where you can cut back.

• Even small savings—buying a small latte instead of a grande, or better yet, making coffee at home—add up over time. Maybe you need to be more realistic about your gym membership. If you haven’t been in months, could you get the same benefit from pairing up with a neighbor or co-worker to take a weekly walk instead?
• Pay down debt. If your debt level—especially credit card balances—is rising, do what you can to pay it down. You may consider consolidating your credit card debt, refinancing, or switching to card that carries a lower interest rate.
• Monitor what you spend every month, comparing your budget to actual spending. Continue to scale back until you balance your budget.

2. Whether or not you are in the black, doing these things can help you get a handle on your finances.

• Check to make sure you are withholding the right amount from your salary to pay federal and other income taxes. The IRS has a useful withholding calculator. If you are self-employed, evaluate the amount you pay in quarterly estimated taxes. If you expect to earn more or less than the previous tax year, you can adjust. Consult your tax adviser or tax preparer for advice.
• Get a copy of your credit report. Equifax, Experian, and TransUnion—the three primary credit reporting companies—are required to give you a free copy of your credit report annually. Review the report and contact the company to correct any errors you find. While you will have to pay a fee to obtain a copy of your FICO credit score (data relied on by financial institutions when deciding whether to extend credit), having your credit score may help you make changes to improve it.

3. If you’re in the black, think about the best use of your financial cushion:

• Increase your retirement savings rate. Many experts recommend saving at least 15% of your pretax income. You could increase the amount you contribute to your employer’s 401(k) plan or to your tax-advantaged IRA. If you don’t contribute to a 401(k) or an IRA, start now! Remember, compound interest is your best friend.
• Take advantage of catch-up contributions to IRAs. If you are age 50 or older, you can contribute up to $7,000 to a Traditional or Roth IRA in 2019. And if you contribute to a 401(k), the limit is $25,000 for people 50 and older.

Review Your Investments

1. Review your retirement savings account statements.

• If you contribute to your current employer’s 401(k), verify how much you are contributing and look at your account asset allocation and how well the investments performed.
• Check your records to see if you have 401(k) balances that are still active with former employers.
• Check your year-end IRA statements. Look at how well your assets performed, how diversified they are, and how much you paid in fees.
• You can capture all of this information on a worksheet in The Entrust Group’s Financial Fitness Workbook here.

2. Review your insurance policies and make adjustments to the amount of coverage as needed.

• Your life insurance policy is an investment that your beneficiaries may rely on if you die.
• Other insurance can be considered investments in controlling expenses when disaster strikes: disability, auto, homeowners or renter’s, earthquake or flood, long-term care, and of course, health care.

Revise Your Investments

1. Rebalance the investments you hold in your 401(k) plans if the performance lags or they are too heavily weighted in one type of fund. You may want to add or remove risk, depending on your age. If you need the assistance of an expert, you may want to seek professional advice. Your choices may be limited, but chances are you do have choices. Read the materials provided by the fund administrator or talk with the employee benefits department if you’re not sure how to proceed.
2. If you are eligible, an option is to rollover your old 401(k) balances into a Self-Directed IRA. When you roll over the funds directly into a Self-Directed IRA, you maintain your retirement plan’s tax-deferred status, avoiding taxes or penalties.
3. Switch your IRA to a Self-Directed IRA. You’ll have more freedom to choose your investments, from real estate to precious metals to private placements. It is also easier to diversify your portfolio in a Self-Directed IRA, as most banks and brokerage houses limit the type of investments they offer in tax-advantaged accounts.
4. Talk to a financial advisor about the amount of risk you want reflected in your portfolio. Typically, the closer investors get to retirement age, the more they tend to invest in lower-risk vehicles.
5. Adjust your insurance policies as appropriate. You may be able to lower your premiums by adjusting your deductibles, or by bundling some policies with the same insurer.

Reach financial wellness with the help of a Self-Directed IRA

Congratulations! You’ve taken the first step to build a healthy financial future by spending time reviewing and revising your finances and your investments. What’s next? You could put your knowledge to work with a Self-Directed IRA, whether you know about real estate, peer-to-peer lending, or even if you know someone’s company or start-up you’d like to invest in.

After you open a Self-Directed IRA, there are several ways you can fund it. You can make an annual contribution by tax deadline (tax deadline is April 15, 2019 for contributions made to 2018 tax year). You can also transfer the assets or funds from an existing IRA or rollover the assets or funds from a previous employer’s 401(k) or other tax-advantaged account. To do that, you will need the services of a third-party custodian, like The Entrust Group.

When choosing a custodian for your Self-Directed IRA, keep in mind that your custodian does not locate, do research or offer investment advice. You make your own choices and do your own due diligence on the investments. The custodian keeps track of the records and completes the required reporting to the IRS. These functions are what preserves the assets’ tax-deferred status. Read more about what a third-party custodian like Entrust does and does not do.

Are you ready to open a Self-Directed IRA? You can open a Self-Directed IRA online under 10 minutes at Entrust. If you’re not sure a Self-Directed IRA is for you or if you have any questions, feel free to contact one of our experts by filling up this form or call us directly at 800-392-9653, option 2.