With 2017 in sight, I could not think of a better time to help you with your 2017 financial resolutions. I also added a few year-end reminders to finish up 2016 strong.
The central theme to end 2016 is to take advantage of tax deductions to lower your taxable income for 2016. Usually I don’t make a huge fuss about this, but the chatter around our next president is that he will lower taxes. If this holds true, your goal should be to reduce your taxable income in 2016. So how do you do that with only one month left?
Increase Your Qualified Plan Contributions via Your Paycheck
You can’t call your 401(k) provider and ask them where to send the check. The only way to get additional funds in there is to increase your contribution percentage for your last few paychecks of the year. (For related reading, see: The Power of Saving Just 1% More.)
Add Money to Your HSA
If you have a high-deductible health insurance plan that allows you to take advantage of a health savings account (HSA), do it. Individuals can contribute $3,350 and families can contribute $6,750. If you are 55 or older you can add an additional $1,000.
Max out Your IRA (Sorry Roth)
To lower your taxable income, only the traditional IRA will help you accomplish that. The Roth IRA is a favorite of mine; however, it will not help you lower your taxable income in 2016. Make sure you are eligible to contribute to an IRA (income limits do apply). If you are under age 50, the maximum contribution is $5,500, and if you are 50 or older you can add an additional $1,000.
Start 2017 Stronger
These are in order of significance; you need to have a sturdy foundation before you start to build up.
Complete Your Estate Documents
The excuse, “I am too young and don’t need that yet” does not work here. We have clients in their 20s who get these documents completed before their parents, which is not a good thing if you’re the parents. Everyone needs to have the vital four: will, living will, healthcare power of attorney and financial power of attorney. If you have minor children, make sure you appoint a guardian as well. I won’t bore you with what they all mean, we will leave that to your attorney. (For related reading, see: 4 Essential Estate Planning Documents for Everyone.)
Build Your Emergency Fund
I am a little bit more aggressive here and like to usually see three to six months of income in your emergency fund (others recommend three to six months of expenses). If you are making $50,000 a year, your emergency fund should fall between $12,500 and $25,000.
The easiest way to do this is to automate your savings. As soon as your paycheck comes in, automate $50-$100 to transfer to a separate account for your emergency fund. Make sure you are using a separate account, so you don’t commingle your bank accounts. (For related reading, see: 4 Keystone Money Habits to Establish.)
Pay off Debt
Your mortgage and student loans are not “bad” debt. Yes, it's ideal to have no debt, but our goal is to get rid of any bad debt in 2017. Bad debt includes credit cards and questionable personal loans. You could add some car loans here since many individuals buy cars out of their price range to show off.
Interest rates have started to rise already, and this will increase any debt payments you have tied to variable rates. With credit cards, make sure you are always paying the minimum due on all your cards. However, make sure you are putting extra towards your card with the highest rate. This is called the “debt snowball method.”
If you have equity in your home, and you are controlled enough, consolidate some of the debt into a home equity loan. You will usually get a better interest rate since your home secures the loan, and you will be able to deduct the interest as well (assuming the loan is less than $100,000). This would be an itemized deduction.
Breaking news: If your credit cards are building a lot of debt, it is a sign that you are living beyond your means. Stop it!
Increase Your Qualified Plan Contributions
Add a percentage to your 401(k), 457 or 403(b) plan. You will hardly notice the extra savings from your paycheck, and it should go a long way in helping with your retirement. Try to make this an annual goal. Always make sure you are saving enough to get the full match from your employer. Your ultimate goal should be to get to 15-20% of your income, not including any company matches. This is our cookie-cutter number, but it is a solid goal to strive for today.
The four to-dos for 2017 are the same four from 2016, with just a little bit more detail. There is a reason why the same four are on the list…they are important. Financial planning is not that difficult, you just need to be true to yourself and hold yourself accountable. Build a solid foundation by taking care of those four items in 2017. Happy New Year and make 2017 your best year yet! (For more from this author, see: Don't Let Risk Ruin a Great Financial Plan)