Editor’s note: This is the first in a four-part series on year-end financial planning designed to help you close out the year on a high note.
As we approach the end of the year, it’s crucial to take stock of your financial health.
A year-end financial review — and, perhaps, some adjustments — can help you assess your situation, reflect on any financial missteps and set the stage for a more secure future. This activity not only brings clarity but also provides an opportunity to adjust your goals and plans based on the events of the past year.
As you might expect, we will start with the “big picture.” In all likelihood, before you begin, you will have a pretty good idea of what you’ll encounter during this part of the process. However, don’t let that stop you from working through the exercise. Sometimes, just seeing it all in black and white can make all the difference. Here we go:
Step 1: Take a Snapshot of Your Financial Status
Start by listing all your assets and liabilities. Look at your bank accounts, retirement accounts, investments, cash value life insurance, property and any other assets you own.
Compare this against your debts: mortgages, car loans, credit-card balances and any other outstanding liabilities.
Subtract your liabilities from your assets, and this is your net worth. It’s a clear financial snapshot that provides a progress report and, perhaps, a basis for decision-making. By understanding where you are today, you’ll be able to set priorities and realistic goals for tomorrow.
Step 2: Review Your Spending Habits
Analyze your spending over the past year. How did you allocate your income? Break it down into categories: housing, groceries, entertainment and so on. Identifying where your money went can be an eye-opening experience and often reveals areas where spending cuts can be made. It can also help you identify disconnects between what’s important to you and how you deploy your money.
Also, take note of any large, unexpected expenses. Were they emergencies, or could they have been avoided or planned for, such as by saving systematically or making transfers? Do you have 2025 goals or planned expenditures that you should start preparing for today? Get a jump on them, and you may minimize “budgetary disruption” next year.
Step 3: Tax Efficiency Check
Tax season is just around the corner, and a year-end financial review is the perfect time to make tax-efficient decisions.
- Consider contributions to tax-advantaged accounts such as 401(k)s, IRAs and Health Savings Accounts.
- If you’re looking to reduce current taxes, maximize your traditional retirement contributions, as this can reduce your taxable income.
- On the other hand, contributions to Roth retirement accounts offer the potential for tax-free income in the future.
- Also look for tax-loss harvesting opportunities — selling investments that have unrealized losses — in your investment portfolio, which can reduce your capital gains taxes and offset up to $3,000 of income.
- This could also be a good time to donate cash or property. Just make sure you get the appropriate documentation and speak with your tax adviser if you have questions.
Step 4: Update Your Goals
Lastly, revisit your financial goals. Whether it’s buying a house, saving for your children’s education or planning for retirement, your goals may have shifted over the past year. Adjust your savings strategy to align with those goals, and ensure that your budget supports them.
Even if they haven’t changed, you should assess your progress. Are you on track or in need of a course correction? A year-end review, when done right, acts as a recalibration for the financial goals that matter most to you and your family.
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