Happy New Year! Now that 2020 is a wrap, let’s capitalize on the New Year momentum and build a plan for tackling those financial to-dos that keep getting put off. Taking on an entire year at once can seem daunting, so I like to focus on the first half of the year, January through June. While your New Year motivation is still high, reach for your calendar and add a few intentions each month to ensure that you stay on the path toward achieving your financial goals. Remember to check back in July for Part 2 of this series for help in setting financial to-dos for the second half of the year. This may seem intimidating, but take things one month at a time, and you can build a solid and achievable plan.
January – Create or review your financial plan – The new year is the perfect time to review your financial or retirement plan. Ask yourself, have your goals changed? Maybe your remote work schedule has made it possible to move to an area with a lower cost of living. Perhaps a child or grandchild on the way means you want to start a college savings plan. Over the last year, quite a bit has changed for most people, and updates to saving and spending goals will help keep you on track.
If you have not already created a financial plan, now is a great time to craft one. For more complex situations, enlisting the help of a Certified Financial Planner to build a plan may be best. For simpler plans, start by trying to define what your goals are. Why are you saving your money? Is it to retire early? To buy a house? Think of short-term goals. How much do you need to save every year to be able to buy that house? Then create a budget. Discovering where your hard-earned money is going is helpful if you need to save more to meet a goal. Make sure that you are building or maintaining an emergency fund. Conventionally this is three to six months of expenses held in cash, just for that rainy day situation. Determine how much you should be investing both inside and outside of a 401(k) or another tax-deferred retirement plan. Cash doesn’t grow! Adjusting your spending, savings rate, and investments can help you reach those goals you set for yourself.
February – Ensure that your 401(k) or IRA contributions are invested – Making 401(k) or IRA contributions does not necessarily mean the money is being invested. All too often, these contributions are held as cash until manually invested. Make sure that you do not have large cash holdings in these accounts to ensure that you are taking advantage of the tax-deferred growth opportunity.
March – Make a 2020 IRA contribution – The deadline for making a tax-deductible traditional IRA contribution is April 15th, so now is the time to determine if an IRA contribution will lower your taxable income for 2020. April 15th is also the deadline for Roth IRA contributions, which are not deductible but will save you on taxes if/when you withdraw the funds in the future. Review which option is best for you with your tax professional.
April – File your taxes – Be on the lookout for any corrected 1099s from investment accounts or late-arriving tax documentation. If you made a tax-deductible contribution to an IRA for 2020, be aware that tax forms showing this contribution (Form 5498) are not typically issued until the end of May. Be sure to let your tax preparer know of this or any charitable contributions made in 2020.
May – Re-evaluate your investments and risk level – The market has experienced some significant ups and downs over the past year, and more than likely, your investment portfolio needs re-balancing. Check on your stock and bond allocations and adjust accordingly. While the S&P 500 returned 18.4% in 2020, it was not an even rise for all stocks: the Dow returned 9.7% and the Nasdaq Composite posted an impressive 45% return. Bond yields decreased substantially. The 10 Year Treasury yield dropped from 1.88% to start 2020 down to 0.93% at the end of the year. If you hold a mix of stocks and bonds, as many of us do, your portfolio is likely more aggressive than you intended it to be, and it may be time to take some of the profits from stock gains and buy bonds to keep in line with your risk targets.
June – Check on investment costs – High-cost investments have significant impacts on the returns you see at the end of the year. Check that you are not paying too much for mutual funds, ETFs, or investment management. For mutual funds or ETFs, find the expense ratio on the fund through an investment research website like Morningstar or Yahoo Finance or ask your investment advisor. Index funds and passively managed strategies average around 0.20%. More actively managed strategies average anywhere from 0.50% to 1%. International and emerging markets stock funds tend to be on the more expensive side, while US stocks will be cheaper.
And now, celebrate! You have accomplished one of the toughest parts of setting big, ambitious goals – building and following a plan you can feel good about. These little successes each month will compound to help you create the financial future you desire. Don’t forget to check back in July for more to-dos to get you through the second half of 2021.
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Jake is a Certified Financial Planner and Wealth Advisor at Willow Creek Wealth Management. Willow Creek is a fee-only financial planning firm in Sonoma County, CA serving clients throughout the San Francisco Bay Area and across the country. Willow Creek offers comprehensive financial planning encompassing investment management, retirement planning, tax planning, charitable giving, sustainable investing, and more.