By FPA members Elaine King, CFP®, CDFA™, and Philip Herzberg, CFP®, MSF
Last Updated: July 19, 2010
Are you on track to achieve your 2010 financial goals and prepared to make timely adjustments aligned with evolving comprehensive financial planning considerations? Now is your ideal time to perform a mid-year financial checkup and determine the steps essential to improving your financial future in the second half of this year and going forward.
Review the following insights and suggestions in key personal finance areas and take action where necessary in relation to your objectives, needs, and long-term financial well-being:
Update your personal balance sheet and double-check actual year-to-date income and expenses against your cash flow projections.
- To identify what you own and what you owe, you should start by recording the current balances of all checking/savings/money market accounts, investments and retirement accounts, use assets (i.e. home equity, personal property, and collectibles), short-term liabilities (i.e. credit cards and student/auto loans), and long-term debt, such as mortgages.
- Now that you have established a baseline, write down all your sources of income and fixed and variable expenses in the first half of the year. Utilize your credit card statements and checkbook to assist you in listing all expenses.
- Subtract total expenses from your income to evaluate the direction your budget is going and link this cash flow figure to your personal financial balance position to make reallocations and monitor progress toward your short- and long-term financial goals. Discerning your spending habits will assist you in diagnosing a workable budget that incorporates consistent savings and investments. For further guidance on assessing and fine-tuning your financial fitness, use the complimentary FPA Free Financial Roadmap tool.
Manage debt, fortify your emergency fund, and be prepared for financial goals.
- First, request a free annual copy of your credit report from one of the three major reporting agencies to evaluate your credit score. Considering how credit card companies are closely scrutinizing consumer use of credit, you should make it a top priority to pay off or pare down your credit card debt and other high rate loans as quickly as possible.
- In light of the current market environment and potential economic problems ahead, subsequently build an emergency fund of at least three to six months of non-discretionary living expenses in liquid money market funds to prepare a safety net in case of an unforeseen expense or unfortunate job loss.
- Planning on purchasing a new home, retiring earlier, or getting ready for the upcoming birth of a child? Reinforce that your income, expenses, savings and investments are in concert with any evolving personal and family circumstances, as well as any shifting financial desires.
Review your employer benefits, insurance coverage, and basic estate planning documents.
- Stay on schedule with accumulating for a comfortable retirement nest-egg by checking your contribution balances on your on-the-job savings plan, such as your 401(k), Roth 401(k), 403(b), or any profit sharing plan, at the mid-year mark. Resolve whether you may need to change your employer retirement plan contribution percentage and if you are at least 50 years old (or will be by December 31), consider making an additional $5,500 catch-up contribution. If applicable, attempt to contribute to the point where you take advantage of any available employer match.
- Gather flexible spending account bills for healthcare and/or dependent care expenses and fill out the reimbursement forms if you signed up with your employer. Estimate spending till the end of 2010 with what remains so that you are sure to drain the account, since some plans do not allow carry-forwards on unspent plans.
- In addition, check all your health, life, homeowners, and property and casualty insurance policies (taking into account those dependent on you), and see if the coverage meets current needs.
- Account for life-changing events, such as marriage, divorce and death. You should check your W-4 number of withholding exemptions and make adjustments so you do not overpay or underpay taxes. Under the supervision of an estate planning attorney and financial planner, you should also draft or update a will or estate plan, and ascertain there is a durable power of attorney in the event you become incapacitated.
Revisit your investment portfolio asset allocation mix and evaluate the need to rebalance.
- Keeping the 2010 second quarter market volatility in perspective, you should review your half-year gains and losses in stocks, mutual funds, and fixed-rate investments to determine whether your portfolio requires rebalancing. Check and confirm that your portfolio is still diversified as you rebalance back to your target asset allocation mix.
- When portfolio holdings go outside its parameters, you should make tactical modifications (i.e. sell the overvalued positions and buy the current bargains) to your asset allocation choices aligned with your investor-specific goals, risk tolerance and time horizon.
- If you are risk-averse and more heavily weighted in bonds in your plan, you should always monitor current interest rates and stay disciplined with your desired asset allocation even though temporary economic events may draw your long-term logic into question. Combine your portfolio rebalancing with your cash flow planning for the next six months if you are retired and drawing down income from your portfolio.
Devote significant attention and prepare for income and estate tax planning for the rest of 2010 and going forward.
- Given the current expectations for higher income taxes and significant changes surrounding estate taxes, you should pay particular attention to tax planning for the remainder of this year into the future. Seek the guidance and enlist the collaborative knowledge of financial planner, tax, and legal professionals to make the optimal holistic decision for your financial future.
- Make your 2010 Individual Retirement Account (IRA) contribution now and aim to max out contributions to your tax-deductible retirement plan, and decide on whether you should sell some investments with anticipated higher income tax rates on dividends and capital gains. Consider a Roth IRA conversion strategy if it works for you, and you have the cash to cover the taxes either in April 2011 or April 2012 and 2013. Seek the assistance of a financial and/or tax professional when evaluating this planning.
- In addition, with the surrounding uncertainties of the estate and gift tax laws, you should make sure that all financial documents are in order. Also, consider gifting versus waiting until death to transfer property to take advantage of the current 35 percent gift tax rate, as there could be significant savings to paying gift taxes this year over future estate taxes. Recognize that the appropriateness of this strategy varies depending on your situational considerations, amount and nature of your assets, and your tax status.
After performing this checkup, you clearly can fully assess your current financial condition and prescribe proactive financial planning adjustments to keep pace for the start of 2011 and beyond!
FPA member Elaine King, CFP®, CDFA™, is Vice President, Director of Wealth & Well-Being at Gibraltar Private Bank & Trust. FPA member Philip Herzberg, CFP®, MSF, is Director of Media Relations & Public Awareness for FPA of Miami-Dade.
