Spring is a time for renewal, a time for out with the old, in with the new. So, while you’re cleaning out the closet and the garage, it’s a good time to give your finances a good spring cleaning, too.
Think about it: The government is already forcing you to do an audit of what you made and what you spent last year with your taxes; what better way to kick procrastination than to take that momentum and check off everything on your financial to-do list—from rebalancing your 401(k) to reviewing your life-insurance policy, checking your credit score and planning out your spending for the year?
“You get involved in your day-to-day life. You’re busy trying to get ahead, taking care of the kids, earning a living and enjoying yourself a little bit. Organizing your finances isn’t something people typically enjoy doing,” said Marie Hoffman, who runs FamilyMoneyValues.com, a web site designed to help Boomers with money management. “But if your goals are to keep your financial house in order and make headway on accumulating assets, then this is just a chore that needs to be done like cleaning the bathroom — so do it!”
She and her husband do four things every year as part of their financial spring cleaning:
- They clean out their files.
- They prepare an emergency document for their grown children in case something happens to both of them at the same time.
- They check their asset allocations and make any adjustments.
- They plan for the year ahead — tax planning, how much money they’ll need, etc.
If you want to take a vacation, do a big renovation or make a big purchase, the spring financial cleaning exercise is a great time to figure out how much you need, how much you have and whether you’ll have to save more.
Chantay Bridges, a real-estate agent in Los Angeles, and her spouse have always been diligent about their finances but a recent death in the family, and subsequent conversations about was there a will, what would happen to the kids, etc., made them expand their spring checklist this year. They plan to:
- Check their credit scores.
- Get their legal business in order (A will, living trust, etc.)
- Make emergency plans. (Buying gold and silver, stocking up on emergency supplies and establishing emergency contacts)
- Check all of their policies to make sure they’re up-to-date (insurance policies, bank accounts, investments, wills, etc.)
- Make sure their beneficiaries are correct.
- Do a debt check — Is everything paid off or is there anything outstanding?
- Check interest rates on their credit cards and any outstanding loans.
- Check their 401(k)s and get financial advice on their distributions.
- Take stock of stocks — check in to see what’s performing, what they should sell and if there’s anything they can write-off due to low or limited dividends.
Jerry Lynch, a certified financial planner in Fairfield, NJ, said beneficiaries are one of the things people screw up the most. For example, people often designate their children as their secondary beneficiaries after their spouse. Minors, however, can’t receive or control proceeds until they’re 18, so that money would either be tied up until then or a guardian would have to be appointed — either way, it’s a headache.
The other mistake they make is not updating their beneficiaries. Lynch recalls a man who was remarried but forgot to change his beneficiary to his new wife. The man died before he could correct that mistake and the money went to — you guessed it — the ex-wife.
Ameriprise Financial suggests you also add these items to your spring cleaning list:
- Reinvest your tax return.
- Review your benefits selections to make sure you're getting the maximum benefit.
- Review your insurance needs. (life, homeowners, auto, disability)
- Plan for extra expenses in the summer ahead, such as child care or camp while the kids are out of school.
Lise Richards of Atlanta, Ga., actually learned the hard way. After a client/income dry spell, her finances, and subsequently her credit score, were in “a less-than-pristine state,” she said.
After her income improved, she took care of a few expenses and got her debt under control. Here’s her to-do list:
- Check credit report.
- Clean up any discrepancies on the credit report.
- Implement a pay-herself first strategy.
- Take an investment class.
“A spring start gives me enough time to pay off my debt and amass some savings,” Richards said. “By September/October, I intend to reward myself with a trip to Italy! This dream vacation keeps me motivated.”
It’s an important balance to reward yourself, but also to keep your eye on the long-term prize: Retirement.
While you’re looking at your 401(k) and allocations, it’s a good time to recalculate — or in some cases, calculate for the first time — how much you’ll need to retire.
“Most people don’t have a clue as to how much they’ll need,” Lynch said. Specifically, they forget about inflation. Inflation averages about 4.5 percent a year (and that’s not including the double-digit jump in gas prices). “Basically, every 18 years your money’s worth half!” Lynch exclaims.
So, if you could retire comfortably on a million now — you’ll need two million in 20 years.
Lynch said if you really want to stay on top of things, you should go to see your accountant or financial planner more than once a year.
“People bring in a shoebox full of receipts and as long as they get a check, they don’t think they’ve lost,” Lynch said. “But if you meet during the year, there’s a chance you can do something that will have an impact on your taxes.”
Ah, spring. A time for throwing out old sweaters and underperforming assets, and vowing to do better in the year ahead!
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