The start of the new year is always a good time to reevaluate your overall financial situation and make the necessary changes to put yourself in a better position for the future. Here are some tips to improve your financial health for the next year.
1. Create or Revise Your Budget
A budget is a great way to keep you on track to achieve your financial goals. Review last year’s records and create a realistic spending plan. Don’t forget to budget in your retirement or investment savings and remember to factor in unexpected expenses. It’s always a good idea to keep an emergency fund with three to six months of expenses in it. Also, make your budget flexible. You might find yourself off track, which is OK if you make the necessary adjustments to get back on track.
2. Review Your Investment Portfolio
Annual reviews of your investment portfolio are a good way to make sure it is still in line with your goals and risk tolerance. What kinds of returns did you experience? High returns can cause your portfolio to become out of balance and might expose you more risk than you are comfortable with. Make the necessary adjustments to realign your portfolio with your goals and risk tolerance.
3. Review Your 401(k) Contributions
Employer-sponsored 401(k)s and IRAS are a great way to save for retirement. Tax-deferred compound interest, generous employer matches and associated tax deductions really make contributing to these plans a must. Review your budget and figure out how much you can afford to contribute per paycheck. Employee contribution limits change every couple years and are higher for those over 50, but try to contribute as much as possible. (For related reading, see: Your 401(k): What's the Ideal Contribution?)
4. Fund Your IRA
If your company does not offer a retirement plan, or if you have excess funds to put toward retirement, IRAs are the next best option. Just like a 401(k), your money within an IRA will grow tax-free, the fastest way to accumulate wealth. You have until the middle of April to make your IRA contributions, and the limits change depending on the year; make sure you do your research to make find out what the maximum contributions are for the current year, and use this information to determine your own contributions.
With a traditional IRA, contributions can be either pretax or after-tax (depending on income levels) and the money grows tax deferred until the time of withdrawal (must be over 59.5). When you take distributions out, you owe ordinary income tax on those withdrawals. With a Roth IRA, the contributions are always after-tax, but when you take the funds out (again, after 59.5) you don’t have to pay any tax on the withdrawals. I tend to prefer the benefits of a Roth IRA, but it depends on your specific situation. There are income limitations for contributing to a Roth, meaning if you make too much money, you are not allowed to contribute. (For more from this author, see: 5 Secrets You Didn't Know About Roth IRAs.)