Without regular maintenance, financial plans tend to fall apart.
Relief benefits are changing, market conditions are evolving and plans made six months ago might not make much sense today if any major life events have since occurred. Enter the midyear financial checkup.
A midyear financial checkup is an opportunity to review the progress you’ve made toward goals set at the start of the year and make plans for the remaining months of the year. It’s an organizational tool as well as a chance for individuals and families to reflect and adapt as needed.
Life events such as a death in the family, a marriage, the birth of a child or grandchild or a job change can trigger tax and financial implications that need to be addressed before the year’s up. As both world and life circumstances change, consider running through this checklist of items to review at the midyear mark.
— Evaluate your budget.
— Plug the leaks in your budget.
— Boost retirement contributions.
— Review your FSA and HSA.
— Take stock of your college savings and student loans.
— Manage and prioritize debts.
— Inspect your credit report.
— Tidy up your taxes.
— Update your estate plan.
Evaluate Your Budget
Those without a budget should start their midyear financial checkup by creating one. Those with an existing budget can review which areas came in under budget and which exceeded planned expenditures, as well as how any income changes may affect their budget going forward.
A strong budget includes a plan to create or maintain an emergency fund — particularly in the wake of a year that left many facing sudden job loss and financial uncertainties resulting from the coronavirus pandemic.
“Life can be full of surprises, and a cash reserve provides a critical safety net for unexpected turns. Use your mid-year financial check-up for a closer look at your emergency fund and determine whether you’re on the right track or should consider boosting this cash cushion — especially if you found yourself dipping into it this past year,” Marcos Rosenberg, head of Marcus Deposits & Marcus Invest at Marcus by Goldman Sachs, wrote in an email.
This fund should cover essential living expenses for three to six months, but the more you can save, the better, Rosenberg says.
Plug the Leaks in Your Budget
If during this budget review you uncover any unnecessary expenses, like excessive shopping, unnecessary subscriptions or other recurring fees, now is the time to eliminate them.
“Review your budget to understand your essential living expenses, and look for opportunities to reduce your financial risk, such as paying off credit card debt or eliminate or reduce lifestyle expenses that may be hard to maintain in a cash crunch (e.g., memberships/subscriptions, shopping habits, dining out, etc.),” Chad Rixse, director of financial planning and wealth CFO at Forefront Wealth Partners in Texas, wrote in an email. “The goal is to be prepared for anything.”
This might include canceling a streaming service that is rarely used or closing a bank account you’re no longer using but for which you’re still paying maintenance fees. To finish the year strong, this is an opportunity to cut the fat out of the year’s budget.
Boost Retirement Contributions
Those who experienced a recent promotion or raise may want to increase their retirement contributions, if able. Those who had a birthday this year may be able to take advantage of catch-up contributions, which allow workers ages 50 and older to contribute $6,500 more to 401(k) plans than younger workers.
Review Your FSA and HSA
Individuals using a flexible spending account must consider their benefits and usage closely each year, as some employers do not allow plan participants to carry over any balance into a new plan year. Speak with your human resources department or benefits manager to learn more and adjust accordingly based on your usage so far this year.
This checkup may also be an opportunity to increase your health savings account contribution to reach yearly maximums, if possible. The rules of HSAs allow these contributions to roll over and stay with you regardless of employment status, meaning there are no downsides to contributing beyond what one might use in a year.
Take Stock of Your College Savings and Student Loans
Eighteen years can fly by, and before you know it, it’s time to send that first tuition payment. Parents conducting a midyear financial checkup should review their college savings rate, any new projections for college costs the year their child turns 18 years old and adjust accordingly. Those who have not yet begun saving for college can consider and research education savings options, such as tax-advantaged 529 plans.
Student loan borrowers received student loan relief and forbearance during the coronavirus pandemic, but these benefits are set to expire Sept. 30. Borrowers conducting a midyear checkup this year should review their budgets carefully in preparation for the return of student loan payments.
Manage and Prioritize Debts
More than a quarter of Americans identify paying off debt over the next six months as their biggest financial priority, according to recent Marcus by Goldman Sachs data.
During your midyear checkup, review and create a plan for debt repayment.
“If you don’t have a payment strategy in place, now is a great time to start. First, you should incorporate paying down debt into your monthly budget to ensure you’re allocating money each month to paying it off — how much you allocate is dependent on your approach to paying down debt,” Rosenberg says.
Two common options for debt repayment are the snowball method, which involves paying off the smallest debts in their entirety first, and the avalanche method, in which individuals pay off accounts with the highest interest rate first.
Inspect Your Credit Report
To open a business, buy a home or open a new credit card, oftentimes a good credit score will come in handy.
One great financial habit to establish is the midyear credit report check. Look for signs of identity theft or anything that seems amiss using the free annualcreditreport.com website.
Tidy Up Your Taxes
Planning can go a long way when it comes to taxes, particularly after a year of Internal Revenue Service delays.
This process includes keeping and maintaining records of any tax-deductible expenses, which could include out-of-pocket medical expenses, mortgage interest and charitable contributions, Rixse says.
“Get organized as best you can. I see people scrambling last minute to gather their tax documents and they often miss things in the process,” Rixse added. “Work with your CPA well in advance of tax season to get ready as CPAs tend to get bogged down come tax season.”
Update Your Estate Plan
Estate planning attorneys typically suggest clients review and update their documents every five years or so, or if they have experienced certain life events, such as a death, birth or marriage.
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Update 08/05/21: This story was published at an earlier date and has been updated with new information.