It has been a turbulent year with the ongoing covid-19 crisis, a war in Ukraine, high inflation, and a volatile stock market.
If your finances are in a different place than they were at the beginning of the year, you are not alone. Also, if you are getting closer to retirement, you need to make sure your finances stay on track.
These 7 essential steps for a mid-year financial checkup will help you adjust your spending, increase your retirement savings, evaluate your debt and investments, gather important documents, and prepare your finances for the following months.
Step 1. Review your current budget and monthly spending.
Take some time to review your budget and monthly spending.
Have you been sticking to your planned budget, or you are overspending in some categories? Your life may have changed since the beginning of the year, and the mid-year checkup is a perfect time to adjust your budget accordingly.
How to start?
Look at your credit card and bank statements, see what expenses could be avoided, and plan to cut them by the end of this year.
Make sure to account for major life changes or upcoming big expenses that may change your financial needs such as retirement, a job change, relocation to another state, or purchasing a vacation home.
Keep in mind, that balancing your income with your spending is the key to saving more money.
By adjusting your budget, you will avoid falling into the overspending trap. Nobody likes to do budgeting. But a budget is an important part of your financial well-being. Therefore, take the necessary steps to stay on top of your finances for the rest of the year.
Step 2. Evaluate your retirement savings.
Savings is the lifeline to financial security. And yet, many people do not put enough time into managing their savings.
Financial experts recommend saving 10 to 15 percent of your income. However, it is so easy to miss this target. After you have adjusted your monthly budget, check your monthly and annual savings rate.
The first step is to look at how your retirement savings has stacked up. Have you maximized your retirement plan contributions? If your income has gone up during the past 6 months, have you increased your retirement contributions?
If you have not this year, make it a goal to increase your contributions to retirement plans such as 401(k), IRA, and Roth IRA next year.
The important thing to remember is that retirement plan contributions allow you to save a lot of money on current taxes and not miss any employer contributions.
When you are a few years away from retirement, being short on retirement savings can be a problem. A mid-year checkup helps you reassess your monthly expenses so you can make necessary adjustments to your spending.
If you have set up your savings rate at the beginning of the year, you will have another 6 months to make up for the lost savings.
How to evaluate your retirement savings?
Make an inventory of all your retirement accounts.
If you are getting closer to retirement, it is important to make an inventory of all your retirement accounts balances and contributions. It helps to see how much you have saved and how much you can withdraw from your retirement savings.
First, make a list of every retirement account you have. The retirement accounts should include 401(k) or 403(b), IRA, Roth IRA, or Roth 401(k). Then add account balance and current contribution.
Second, review how much you contribute to your current retirement savings plan. Have you maxed out your retirement savings for this year?
The 2022 contribution limits are:
- $20,500 for 401(k) retirement plans. And if you are age 50 or older, the catch-up contribution is an additional $6,500. So, you can save a total of $27,000.
- $6,000 combined contribution for traditional IRA and Roth IRA. And the catch-up contribution for people aged 50 or older is $1,000. So, you can save up to $7,000 with your pre-tax money (IRA) and after-tax money (Roth IRA).
Even if you cannot max it out, see if you can increase your contributions even by 1 percent. Another option is to start reducing expenses in your budget, so you can put more money into your retirement savings.
Step 3. Assess Your Debt.
The middle of the year is a great time to sit down and check your progress on paying down your debt.
A good piece of advice is to divide your total debt by your income. That ratio should get smaller over time as you reduce your debt. According to financial experts, your debt-to-income ratio should be zero by age 65.
Look at your mortgage, credit cards, car loans, or personal loans and make a list (if you don’t have one) of every single outstanding debt.
There are two strategic and popular methods to get out of debt faster.
The Avalanche method helps to reduce the debt that carries the highest interest rate. The Snowball method helps to get rid of debt with the lowest balance first, and then move on to the next lowest one.
If you are only 5 to 7 years before retirement, you should consider paying off all your debt before you retire including a mortgage. Getting into retirement with any kind of debt will put a significant burden on your lifestyle.
When you are working, you have years of earned income to pay a mortgage, credit card, student, or any other kind of loan. But once you retire, you will be living on a fixed income.
When you start living on a fixed income, it is hard to pay off debt if you need to pull big chunks of money from your savings. Although, big withdrawals from retirement funds could push you into a higher tax bracket.
To pay off all debt including a mortgage might not be realistic for everyone. However, the less debt you have, the better you are prepared financially for retirement.
Step 4. Look at your investments and rebalance your portfolio.
Things change all the time in the finance world, and it was no different in the last 6 months when the stock market was shifting.
We all noticed that it has been a volatile time for financial markets. If you have been afraid to look at your statements, it is time. A mid-year is a perfect time to look at your portfolio and review where your investments are.
Take the opportunity to review your asset allocation and make sure your portfolio is diversified and invested for growth.
You should have a mix of stocks, bonds, mutual funds, and other assets that fits your retirement goals. If the current market caused a shift in your portfolio, it needs to be corrected to maintain the diversification you originally planned.
If you do not automatically rebalance your portfolio, recent losses or gains may have pushed your asset allocation out of balance. Even though your portfolio has done well, you want to make sure you stay within your percentage goals.
It can be tempting to stay away from stocks to reduce the risk of losing money in your retirement funds. But stocks provide growth and investing for growth is important at this stage of your life. If you retire at 65 and spend 20 years in retirement, you need to have enough growth to make your money last that long.
You need to remember that a well-balanced portfolio will help you get through market downturns. Also, it will generate a retirement income to cover your living expenses.
How to Set Up Your Retirement Portfolio
Step 5. Check your emergency fund.
A solid emergency fund is helpful when financial troubles come your way. Most financial planners recommend having 3 to 6 months’ worth of living expenses to be tucked away.
The past two years of a global pandemic and current high inflation were hard on most of us. But these past years have shown how important it is to keep some money in a safe account, so you can cover your bills if your income stops.
It is a good idea to keep your emergency fund in a money-market account or other accessible account, so you know the money is right there if you need it.
Also, if you have depleted your emergency fund, make it a goal to re-build the fund in the next 6 months. One of the best things you can do in the remaining time of this year is to make sure you have an emergency fund.
Step 6. Check your estate planning documents.
Another essential part of a mid-year financial checkup is the status of your estate planning documents.
You should have the 4 essential estate planning documents: a will, a revocable living trust, a general durable power of attorney, and a health care proxy. If you do not have these documents, I recommend making an appointment with an estate planning attorney.
If you already have these documents, keep them up to date and make sure you have suitable executors, trustees, and guardians in place.
Also, make sure that the list of your beneficiaries is up to date as well.
If you have welcomed a grandchild to the family do not forget to add his/her name to the list. Additionally, if there has been a change in the family such as a marriage, divorce, or death, make sure to update your beneficiary list.
Step 7. Update your goals.
I encourage you to look at all your financial and retirement goals and see where you are.
Your goals might not be achievable if your life situation has changed. For example, if you plan to retire at 65, but you are short on retirement savings, you might have to continue working for a few more years.
Major life changes such as marriage, divorce or death, relocation, adjusting to new living arrangements, loss of job, etc. can have an enormous financial impact. A mid-year review can help you adapt your financial goals to reflect these changes.
Take some time to review your goals and determine if you are taking the necessary steps to achieve them. And if you ignored them for the first 6 months, now is the time to create a plan for the rest of the year.
You can create a new budget, reduce your expenses, increase your contributions, start reducing your debt, and a lot more.
Final thoughts
A mid-year financial checkup is a great strategy to help you stay on track with your financial well-being. It is easy to fall into bad spending habits, get off track with your budget, forget about your investments and ignore your financial goals.
But with a mid-year checkup, you can get a fresh start and set new goals. You still have plenty of time before the end of the year to reflect on your priorities and what you want out of life.
What is on your mid-year financial to-do checklist?
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