9 Essential Elements for Your Financial Checkup This Year
As 2020 closes out, set aside time to check your financial health. An annual financial checkup is like your annual exam at the doctor’s office. Both ultimately save you money by catching problems before they manifest into something major. You want to be financially healthy to deal with any surprises 2021 might throw your way. As we’ve seen from 2020, you never know what’s going to happen. Be sure to include these 9 essential elements for your financial checkup this year.
1. Review your short and long-term financial goals.
- Are they still relevant?
- Have there been changes in your financial life, such as a job loss or income reduction?
- Do you need to adjust or pivot?
If you’re not in the habit of setting financial goals, do it now. Think short and long-term and write everything down.
2. Assess your 2020 budget performance.
Take out the budget you prepared last January.
- Did you meet your savings targets and debt reduction goals?
- Was your income projection accurate?
- Did you spend more on expenses than you intended? Financial experts suggest that 80 percent of your budget be allocated to monthly expenses and 20 percent to discretionary spending.
- Review your budget and look for ways to increase cash to put toward your financial goals.
3. Did you pay your bills on time?
This is an essential element for your financial checkup this year. Your bill-paying history impacts your credit score. Did you pay all your bills on time? If you had trouble with this, you might want to set up automatic payments.
4. Can you lower your monthly bills?
Do you have a lot of high-interest rate credit card bills? Maybe consolidating to a transfer card would be better. Alternatively, you could take out a debt consolidation loan. Are you getting the best deal on your cable and mobile packages? Are you paying for extra services that you don’t use?
5. Your Credit Report
Your credit score impacts almost every facet of your life. It plays a key role in what kind of interest rate is offered when you get a loan. A bad credit score can even cause you to be denied a lease. Order a copy of your credit report. Look for errors or evidence of fraud.
6. What is your debt-to-income ratio?
How much of your monthly income goes to debt payments? Here’s how to find out: List all your bills, including:
- Personal loans
- Auto loans
- Student loans
- Credit card debt
Add everything up and then divide by your pre-tax monthly income. This is your debt-to-income ratio. You don’t want it to be higher than 43%, or you’ll have difficulty securing credit when you need it.
7. What is your debt-to-income ratio?
Are you expecting a big tax refund? Unless you prefer to save money this way, it’s better to adjust your tax withholding and have more money going toward your monthly expenses and debt reduction goals.
8. Did you save for emergencies?
Your emergency savings account should be enough to cover three to six months of living expenses. If this is too much for you, don’t worry. Just start saving as much as you can.
9. Retirement savings
Your employer-sponsored 401(k) retirement plan is one of the easiest ways to save for your retirement. Both you and your employer can contribute a maximum of $19,500 to your retirement account this year. If a 401(k) is part of your benefits package, be sure to use it. If not, max out your traditional or Roth IRA. The maximum contribution this year is $6,000. If you are aged 50 or older, you can contribute up to $7,000 to your IRA.
These essential elements for your financial checkup this year should help you create a road map for a new year free of financial stress.