Kahan: Get Your Financial House in Order: A 12 Step Plan

Kahan: Get Your Financial House in Order: A 12 Step Plan: It’s a new year, a new decade and a good time to get your financial house in order. Whether you do this on your own or with a financial adviser, a review of your finances and financial goals can keep you on track to meet your lifestyle expectations.

It’s very possible that a lot has changed for you in the last year. From an Investment standpoint, markets did well in 2019. Your 401Ks may be up and with your investment gains, maybe you freed up your spending. Remember not all years look like 2019 from an investment perspective. That’s why it is as important to make sure your finances are on plan after a good year as it is after a bad one. Here are 12 steps to take to get your financial house in order.

Identify your Financial Goals: You may feel closer to your goals after a good year in the markets but remember you are also a year closer to buying a new home, paying for college, or retirement. How much ground have you made up? What would it take to put you behind?

Check emergency funds, review estate planning & insurances: You should have at least three months of expenses in liquid cash accounts – not in stocks or bonds. Check beneficiaries on 401Ks, IRAs, life insurance. Do you have the right amount of life, auto, and home-owners insurance?

State your goals in time frame increments and quantify them: Perhaps you would like to buy a new house in two years, pay for college in ten and retire in twenty years. How much do you need to save to finance each of these goals – to fill each bucket?

Estimate how much you need to save: Most people think in terms of how much they can afford to save. But it’s important that you first identify how much you need to save to fill each of your buckets.

Do a tax estimate: By yourself or with your accountant. Did you sell stocks from a taxable account or receive taxable distributions from a mutual fund? If so, are you prepared for the capital gains taxes you will owe? Or are you receiving a sizeable tax return? This is money you could have used for additional savings – perhaps in a retirement account that could have reduced your tax load. Adjust your withholding for the current year.

How much can you save: Start off with how much you did save last year. Because if you didn’t save it, or pay it in taxes, then you spent it. Add back any tax returns from over-withholding that you would expect to recur and that’s how much you can save. (At least for now.) If you are not saving enough to meet your goals, it’s time to look at your spending.

Conduct a budget review: Review all your credit card and bank statements. Where did you spend your money in 2019? Identify where you overspent. Where can you cut back? (Consider downloading financial management software to help you budget. Mint, from Intuit, is a free personal financial management service you can connect to all your accounts, and it will fill your budget buckets for you.)

Do you have to adjust your goals? If you can’t meet your savings goals now, you may have to consider adjusting your goals. How would your finances look if you put off buying a home for a few extra years, lower the budget on the new home you want to buy, or delay retirement for a few years? Have you thought about sending your children to a state school? Remember, you can borrow for college, but you can’t borrow for retirement.

Identify Lifelines: Do you have any lifelines that can help you meet your savings goals? Can you tap into home equity to finance college? Are family members able to help pay for college? If so, would they be willing to give you money now to open a NY State 529 College Savings Plan? Or fund their own?

Set your savings plan: Now that you have determined how much you can save – it’s time to set your savings plan. Ideally, you would maximize your 401K contributions – currently $19,500 per year and an additional $6,500 if you are over 50 years old. If you feel you can’t afford to fund a 401K – at a minimum you should fund enough to get the company match. Remember, after tax savings, $1,000 in contributions may cost as little as $600.

Most people are in between these extremes. For instance, you may need to save $2,000 a month for retirement and $1,000 for college but you only have $2,000 a month to save. With our clients we take these situations on a case by case basis. And may split up the money depending on factors specific to the client.

Allocate new investable funds: Once you have decided how much to save in each of your buckets it is time to allocate your new investable funds into the investment options available to you, according to your target allocations for equities and fixed income securities.

Rebalance your existing portfolio: Finally take a look at your current portfolio. After such a strong year stocks may have risen from 60% to 65% or 70% of your portfolio. If so, you are now overweight stocks and you will want to rebalance your allocations to return to your allocation targets of 60% equities and 40% bonds and cash.

Take these simple steps to get your financial house in order or call a certified financial planner to help you.

By Scott Kahan, Certified Financial Planner professional & President of Financial Asset Management Corporation

Financial Asset Management Corporation has provided fee-only financial planning and wealth management services for individuals and small businesses in the Tri-State area since 1986. They serve 175 clients and manage over 250 million dollars in assets. (26 South Greeley Avenue, Chappaqua, NY, (914) 238-8900; www.famcorporation.com )

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