The end of the year isn’t just made for celebrations, it’s a time to take a look at your finances and see where you stand. We don’t just mean a quick glance at your savings and checking accounts, a financial review means assessing your financial progress and setting goals for the new year.
Why Budget Reviews Matter
A budget review means taking a close look at your income and spending over the past year. While many people get stressed out over money, a budget review can help you reduce that stress by giving you a clear picture of your financial situation and can help you set goals for the new year.
Take a detailed look at your credit card, debit card, and other financial accounts to remind yourself of where and how you spent your income.
Determining your spending habits is an important part of any budget review, as it gives you a chance to consider how you spend and look for ways you might cut back.
Identifying Areas Where You Overspent or Underspent
When analyzing your budget, it’s a good idea to break down your expenses into different categories such as housing, food, transportation, entertainment, and savings. You should also examine your debt load and interest costs from things like mortgages and credit cards.
Doing this can be especially helpful if you’re already following a budget plan. You can compare your actual spending for the year against your budgeted amounts, to identify discrepancies.
Try to look for patterns in your spending. Do you frequently overspend on things like entertainment, carry out food or dining out? You should also consider your spending habits during holidays or vacations. Do you typically start a vacation or your holiday shopping with a budget in mind, but wind up spending more?
Analyzing your spending habits can help you plan for the coming year with a budget that accurately reflects your financial situation. It’s also something to keep in mind through the rest of the year, so you don’t go off track with your budget.
Evaluate Necessities vs. Luxuries:
When performing a financial checkup and analyzing your budget, it’s important to differentiate between necessary expenses and discretionary spending.
Necessary expenses are things you absolutely have to spend money on. This includes your rent/mortgage, groceries, property taxes, insurance, and car loans or repairs.
Unnecessary expenses, also known as discretionary expenses, include eating at restaurants, food delivery, alcohol, tobacco, streaming services, and entertainment such as movie tickets and sporting events. They can also include expenses related to hobbies and sports, such as gym memberships.
If you use a credit or debit card for most of your expenses, then keeping track of your spending is pretty straightforward. Even so, many people use budgeting apps for keeping track of their expenses. Not only does this make it easier for you to review and analyze your budget, it also serves as a reminder about your budgeting goals and can help you stay on track.
Personal Financial Management Tools
There are many apps available that make it easy to keep track of your financial status.
All Union Bank customers have access to our interactive Personal Financial Management (PFM) interface for online banking, budgeting, and account monitoring.
By linking your external accounts, credit cards, assets and loans you can use PFM to create budgets and track your spending habits.
The interface is easy to use and helps you see the total picture of where you stand financially, including your net worth, budget, trends, and debts.
Evaluate Your Savings
Your savings plan should include an emergency fund and retirement accounts. With the right strategy, you could let your money work for you by setting something aside in interest-bearing accounts.
The Importance of an Emergency Fund
Everyone has unexpected expenses at times, whether it’s a medical emergency, car repairs, a job loss, etc. Without an emergency fund to rely on, many people resort to putting these expenses on their credit cards, which costs them more money in the long run. They might also try to borrow from family and friends, which can put a strain on relations.
That’s why many financial experts recommend having three to six months’ worth of living expenses that they can access at any time, such as a savings account where you can also earn interest.
Retirement Accounts
Even if retirement seems a long way off, the time to start saving for it is now. The longer you save for retirement, the more you can take advantage of compound interest where your investment grows by increasing amounts every year.
If your employer offers a 401(k) plan you can contribute part of your income on a pre-tax basis, so you’re reducing your income taxes while saving for retirement at the same time.
If your employer offers matching funds, try to at least meet that threshold. For example, if your employer matches up to 3% of your 401(k) contributions, you’d be throwing away free money if you contributed less than that amount.
You could also consider investing your funds in individual retirement accounts (IRAs and Roth IRAs).
As part of your annual financial checkup, it’s a good idea to check your current retirement account balances and consider if your contributions are keeping you on track to meet your long-term goals.
Making Financial Goals
Performing a financial checkup and putting together a budget might seem like an insurmountable task. That’s why it’s important to break your objectives down into smaller pieces that are easier to tackle. This includes both short and long-term goals.
Short-Term Goals
Your short-term financial goals are objectives that you could reach within a year or less. Even if they seem insignificant, meeting these goals is important for building momentum and maintaining financial discipline. Here are some common short-term financial goals:
Saving for a Vacation
Choose where you’ll spend your vacation and get an idea of your total costs including food, travel, accommodations, and souvenirs. Figure out how much you’ll need to set aside overtime and break this total amount down into weekly or monthly contributions.
Paying off a Small Debt
Even a small debt can soon become a much larger one if you’re paying interest on it. There are two approaches that many people use for getting out of debt:
• The snowball method: Pay off your smallest balances first before focusing on larger ones (similar to a snowball rolling downhill).
• The avalanche method: Pay off your debts with the highest interest rates first, before tackling any debts with a lower interest rate.
Building an Emergency Fund
Financial experts recommend having an emergency fund that could cover three to six months of your living expenses. If that seems like an impossible goal, try aiming for a smaller one.
Try setting aside a month’s worth of living expenses or a fixed amount, such as $500. Once you’ve reached this short-term goal, you can focus on gradually increasing it over time.
An emergency fund is a financial security blanket that can protect you from high interest rate costs if you had to meet a budgetary shortfall by using a credit card.
Saving for a Major Purchase
When you have a major purchase looming on the horizon, it might be tempting to obtain financing or put it on a credit card. You’ll be better off financially if you can save up for that new appliance, vehicle purchase, or home improvement project.
You could start by researching what you’re looking for and compare prices, then set a target amount that you need to save and a plan to reach that goal within a specific timeframe. Giving yourself a fixed amount and a deadline can help you stay on track financially.
Long-Term Goals
Longer-term financial goals are those that take more than five years to achieve. While that might seem like a long way off, it’s going to require substantial planning and a consistent effort to achieve them.
That’s why it’s important to start with shorter-term goals that you can more easily achieve, and they should be ones that build towards your longer-term goals.
Here are some examples of common long-term financial goals:
Saving for Retirement
Building a retirement nest egg takes a long time but is important to ensure your financial independence in your golden years. By starting early, you can take advantage of compound interest where your investment grows by increasing amounts each year.
If your employer offers a 401(k) plan, by putting away as much as you can, you’ll save money on your income taxes and the interest you earn will keep growing year after year.
You could also save for retirement using a traditional IRA or a Roth IRA. The main difference between them is when you get a tax break.
With a traditional IRA, your contributions are tax-deductible, but your withdrawals during retirement are considered taxable income.
Buying a Home
Owning your own home offers several financial advantages. It’s an investment that should grow in value, and you can deduct the mortgage interest you pay from your income tax returns. You can deduct up to $750,000 of your mortgage debt as an individual, or $375,000 each for a married couple filing separately.
To buy a home, take a look at the housing market where you want to live to get an idea of what the prices are, where they’re heading, and how much you might have to pay on a down payment.
You’ll also need to account for your cost of owning a home such as property taxes, maintenance, and insurance.
As you save for this objective, you’ll need to maintain a good credit score as this will dramatically affect your ability to obtain a mortgage and how much interest you’ll have to pay.
At Union Bank, we offer several types of mortgages and construction loans so we can help you find the best option for you.
Funding Education
Higher education is getting increasingly expensive, so saving up for tuition and other costs is important if yourself or your kids want to attend college—especially if you’d like to avoid taking on student loan debt. Two common ways of saving for college are 529 plans and Roth IRAs.
A Roth IRA is an individual retirement account. A 529 plan is a type of college savings plan that is backed by colleges and states.
More than 30 states allow either state income tax deductions or tax credits on all contributions to 529 plans, but not Roth IRAs.
The contribution limits for 529 plans are $18,000 for individuals or $36,000 per couple in 2024. The limit on Roth contributions is $7,000 per year, or $8,000 for those age 50 or older.
There aren’t any aggregate contribution limits for Roth IRAs, but 529 savings plans have total contribution limits that vary by state. The state limit for New Hampshire is $569,123 and Vermont’s limit is $550,000.
Third-party contributions are allowed for 529 plans, but not Roth IRAs.
Planning for Next Year
Make sure you reevaluate your financial plan every year and take a look at where you’ve been financially. Were you able to meet your goals? Were your budget forecasts accurate, and how close did you stick to them?
Use your performance as a baseline for planning your budget for the following year, and look for ways you can reduce spending.
By reviewing your financial goals and successes every year, and setting shorter and longer-term goals, you can remind yourself to stay on track and reduce the odds that you’ll go off budget in the future.
We’re Here to Help
Year-end financial checkups are important for meeting your financial goals. They’re a chance to take stock of where you are, where you need to be, and how you’ll get there.
At Union Bank we can help you meet your goals. Our wealth management team can help you with financial planning such as investment management, retirement strategies, and personal trusts. If you’re not sure where to start, simply contact us or stop by one of our 18 locations in Northern Vermont and Northern New Hampshire.
