Mark Hauser, co-managing partner at Hauser Private Equity, highlights ten financial review tips to end the year on a positive note.
End-of-year planning often means preparing for holiday parties and scheduling next year’s summer vacations. However, forward-thinking individuals use the last quarter of the year to get their financial houses in order. Private equity principal Mark Hauser outlines ten end-of-year actions to help everyone start the following year with an excellent financial game plan.
Purpose of a Year-End Financial Review
Individuals of every income level can benefit from a year-end financial review. This well-rounded checklist has two specific objectives. Ideally, an individual can make progress on both goals at once.
Tracking Preset Financial Objectives
First, the individual should address each financial goal on the end-of-year checklist. Some items require regular monitoring, while others dictate that the person takes a certain yearly action.
Evaluation of Spending Behavior
Next, individuals should determine if their spending falls within their preset parameters. If the answer is “yes,” they are well positioned to stay on track toward their financial goals. However, a “no” answer means they must reevaluate what’s possible given their excess spending behavior.
Mark Hauser Discusses 10 Key Components of a Year-End Financial Review
A comprehensive financial review touches on most aspects of an individual’s life. This evaluation provides a solid foundation for the upcoming year’s personal finance endeavors. Mark Hauser noted that each should conduct a similar review if the family contains multiple income earners.
Individualized Cash Flow Analysis
By taking a cash flow snapshot, the individual can see how much money flows into (and out of) their accounts. In addition, the review should include expected income changes and projected large expenses.
First, private equity expert Mark Hauser recommended that the individual list all applicable income sources. In a multi-income household, every wage-earner’s income should be included. The list should include all wage-earning family members’ part-time jobs and/or side hustles. If someone plans a leave of absence from work or wants to leave the workforce to raise a child, they should note that.
Next, Mark Hauser noted that the review should show all monthly and annual expenses. If the individual plans to build an addition to the home or incur another hefty expense, they should state that in the review.
Free Annual Credit Reports
An individual’s credit report can positively (or negatively) affect a credit card decision and/or mortgage rate. Many people need to learn that a credit report can also impact a hiring decision and/or apartment rental decision.
By frequently reviewing their credit reports, an individual can catch erroneous entries. Regular monitoring can often catch identity theft before the fraudsters further their criminal activities.
Mark Hauser explained that each of the three major credit reporting agencies allows an individual to receive a free credit report every 12 months. Equifax, Experian, and Transunion are the three major credit reporting agencies.
Tax Withholding Update
Mark Hauser recommended that everyone review their income tax withholdings. A major life event, such as a marriage, a new baby, or a divorce, likely dictates a withholding change. The IRS Tax Withholding Estimator can help taxpayers in every category figure the right income tax to be withheld.
Next, individuals should ensure that employers, financial institutions, and other relevant parties have the person’s correct address. Gathering relevant documents and statements is advisable to streamline the first quarter’s tax preparation work.
Debt Payoff Analysis
As the year winds down, it’s an ideal time to review a personal debt payoff plan. An individual may be focused on paying down their credit card debt. They may want to make a bigger dent in their mortgage and/or loan payments. Private equity expert Mark Hauser emphasized that evaluating debt payoff goals against actual progress makes sense.
Mark Hauser recommended that an individual add another income source to the mix to accelerate the repayment process. A part-time job or a side hustle are good options. Even if the income source is only temporary, it may give the individual some financial breathing room.
Emergency Fund Focus (or Refocus)
Multiple personal financial experts extol the benefits of an emergency fund. This particular account is designed to cover substantial unexpected expenses such as a hefty medical bill. Individuals could also dip into their emergency fund to pay for an expensive vehicle or home repair.
Financial experts typically call for an emergency fund covering three to six months of expenses. This dollar figure should include the significant expense plus average living costs for that period. Financial expert Mark Hauser emphasized that individuals should not raid their emergency fund to cover current living expenses or discretionary items such as vacations.
Insurance Policies Analysis
Insurance coverage is based on risk. When a policyholder’s risk changes, their coverage and rates change accordingly. To illustrate, a family may add a new teenage driver to an auto policy. This typically results in an increased accident risk and higher rates.
A couple may move to an area with a high risk for hurricanes or wildfires. Again, the insurer incurs higher-than-normal coverage risk. The company typically transfers this risk to the area’s policyholders.
Because of consistently high inflation, insurance rates also continue to climb. With increased material and labor expenses, claims settlement costs are also higher. Depending on the policyholder’s situation, insurance deductibles may also need to be raised or lowered.
An individual should schedule a consultation with their insurance agent near the end of each year. The goal is to see if home, auto, and/or life insurance coverage needs to be revamped. The individual should also advise the agent of expected changes during the coming year.
Investment Portfolio Update
Each individual’s investment portfolio should contain investments that reflect their life stage. Their age, investment time horizon, tax status, and risk tolerance are also key considerations.
From this perspective, the individual should gauge how their current investment portfolio syncs with their preset investment goals. Concurrently, some asset percentages may need rebalancing based on desirable (or undesirable) performance during the year.
If an individual thinks selling certain assets makes sense, they should consider the potential tax liability. For an optimal outcome, Mark Hauser recommended that each individual consult with a qualified financial advisor and a tax accountant.
Participation in Open Enrollment
Each year, benefits-providing employers offer a fourth-quarter open enrollment period. Open enrollment allows employees to change their current benefits or switch to new ones. The changes will be effective in the coming year.
To illustrate, employees can revise their health insurance to reflect changing medical needs. They can also make changes to their dental insurance, life insurance, and other applicable benefits.
During the open enrollment period, employees can also add (or remove) a significant other (including a spouse). Employees who need to make these selections and/or changes must retain their current benefits until the next open enrollment period.
Additional 401(k) Contributions
Many employers offer a 401(k) retirement savings program. This plan enables employees to channel part of each paycheck into a targeted investment fund. The employee can select from multiple investment vehicles (generally mutual funds). Employers often match workers’ 401(k) contributions.
Each retirement savings plan offers two 401(k) types. A traditional 401(k) benefits from pre-tax employee contributions. Therefore, the employee’s taxable income is decreased, although their withdrawals are subject to taxes.
In contrast, a Roth 401(k) contains after-tax contributions. Employees don’t receive a tax deduction during their contribution year, although they don’t pay taxes on withdrawals. For reference, employers can contribute to both 401(k) plans.
Employees with a 401(k) should consider funneling additional dollars into the plan before the year’s end. Adding holiday or year-end bonus funds to the 401(k) is also a good move. If the firm matches contributions, and the employee still needs to max out their portion, they should consider doing so before the calendar year ends.
End-of-Year Charitable Donations
Individuals of all income levels donate to registered non-profit (or charitable) organizations. These funds enable the non-profit group to provide valuable services to local and/or regional residents.
Many individuals make financial donations to charitable groups. Other donors make “in-kind donations,” such as household goods, vehicles, and other non-monetary assets. Some non-profit groups operate thrift stores. These community-based outlets sell donated goods, with the proceeds targeted to the organization’s work.
Although donations are welcome throughout the year, December accounts for almost one-third of annual donations. For the current tax year, the non-profit must receive all donations by December 31.
Although some individuals donate money or goods to receive a tax deduction, that may (or may not) occur because each person’s tax situation is different, a knowledgeable tax professional can determine whether an individual qualifies for the deduction.
Methodical Planning is Key
Individuals should avoid a breakneck rush to complete all their end-of-year financial planning tasks. This haphazard approach is likely to result in missed information and suboptimal outcomes. Instead, private equity principal Mark Hauser noted that allowing plenty of time and taking a methodical approach will help set the stage for a productive year ahead.