By Massi DeSantis
We make gift lists for friends and loved ones, so why not a list of gifts for our future selves? At its heart, financial planning is a list of things you can do today to improve your future.
This year, include your future self on the list of loved ones and give yourself a gift. Sit down with a glass of prosecco, eggnog, or your favorite drink and think about what you’d like to accomplish next year and beyond. Then browse through the ideas below for actions you can take over the holidays. Simply pick what inspires you. If you are not sure, start with the first item below; it will motivate you to tackle other ones on the list!
Take Control of Your Financial Life
Getting your financial house in order is the first step in taking control of your financial life and getting serious about your long-term life goals. Start with a list of everything you own. This may include your bank accounts, your retirement accounts, other investment accounts you may have, and your properties, like your cars and your home.
Next, make a list of what you owe including all your debts, like your credit card balance, your car loans, student loans, mortgage, etc. The difference between the sum of the two lists is your financial net worth.
The next step is to list all your sources of income, including your job and any side gigs, pension payments, Social Security, alimony, etc. After that, list all your planned savings. This includes money you put in your 401(k) plan, other retirement plans, your health savings account, and other savings that you regularly make. Together, your net worth, income, and savings, are a good snapshot of the resources you have available for your future goals.
Check this post for more tips and a 4-step approach to get financially organized. One of the best ways to accomplish this is to use apps like Mint or PocketGuard. These apps will also help you track your spending, which we cover below.
Take Control of Your Spending
Most of us don’t have unlimited resources to afford all the spending we would like. We need to be efficient with our resources. Budgeting is crucial to financial planning because it gives you awareness about how you use your resources, and highlights your financial strengths and weaknesses. Budgeting may sound boring, but it does not have to be. Your budget does not have to be perfect and you can choose many ways to categorize and track your spending. We have created a simple way to get started with budgeting, without actually creating one, and a guide with simple steps to create your first budget. For app or spreadsheet-oriented people, the apps we suggested above help you track your spending, or you can simply download your checking account and your credit card transactions.
Set Meaningful Goals
A key part of any plan is to set goals that are meaningful to you. Goals are measurable objectives that require planning and effort to achieve. You are likely to work towards your goals and stick with your plan only if the goals are meaningful to you. Take a look at our guide on goals to get started. Creating goals is the first step to help you implement change and motivate you to tackle other ideas in this list.
To set measurable goals, it is often important to start with big picture motivators, then translate them into dollar numbers. For example, retirement can mean very different things and different dollar amounts depending on how and where you plan to live it. So, think about what your first year in retirement might look like, and what it would cost to finance it. Then think about five years down the road, and 10 years down the road. What would change?
Plan for a Safety Net
Going through a period of real uncertainty like the last couple of years is the best way to appreciate our nature towards risk and evaluate the plans we have in place to overcome setbacks. You don’t have a sound plan for your desired goals in life until you plan for emergencies and setbacks. Read our guide to creating a safety net to set a goal appropriate for your situation and start working towards it.
Start a 529 Plan for Higher Education
The college goal is a top financial priority of families, right up there with a good retirement. However, many parents don’t have dedicated accounts, like a 529, to save for this important goal. 529 plans are savings plans that are specifically designed to help you save for college and offer great tax and other advantages. Given the high-and-rising costs of higher education, most parents would benefit from using 529 accounts.
Opening a 529 with your children, grandchildren, or the children of your loved ones as beneficiaries is a great way to give a meaningful gift this holiday season!
Start Your Own Retirement Plan
A common retirement planning rule of thumb is to save between 10 and 20% of your income, depending on your income level. A lot of people get close to at least the 10% number with a company-sponsored plan like the 401(k), particularly if their company matches some of the contributions. But what if you don’t have a company-sponsored plan? Many people, about 30 million or roughly 20% of the labor force, report some self-employment income, and that number has been growing over the last decade. Recently, we are experiencing the so-called great resignation, where workers quit jobs to become their own bosses.
This holiday season, make your own retirement plan! Start with 10% of your income, and increase that amount over time. If you think you cannot save at least 10%, save as much as you can, and plan to revise your savings upward as you get a raise or an unexpected increase in income.
Optimize Your Portfolio
Think of your investments as the engine that will help you grow your wealth and achieve your financial goals. It’s important for your investments to be in sync with your goals. Start by listing your goals and priorities, then go through this process to set an investment allocation tailored to your goals.
Having created a target portfolio that is appropriate for your goals, priorities, time horizon, and risk preferences, the next step is to make sure the portfolio is built with the appropriate components. Start with our guide to common sense investing in mutual funds and ETFs to learn how to avoid unnecessary risks and choose cost-effective funds for your goals.
Use your Savings Efficiently
When it comes to savings for different goals, you have options across types of accounts. You have taxable accounts, tax-deferred accounts like 401(k), IRA, and 529 accounts, and tax-exempt accounts like Roth 401(k) and IRA, and potentially HSA accounts. Learn more about the different options and how you can use them to maximize the value of your savings.
In retirement, you are likely to rely on a number of sources for income: 401(k) or IRA accounts, taxable accounts, and tax-exempt or Roth accounts, in addition to Social Security. Make sure your withdrawal strategy is optimized to make the most of your savings. Take a look at why the right strategy can substantially extend the longevity of your portfolio, and learn about our three-step approach to design a tax-efficient spending strategy.
Learn your Medicare ABCs
If you are close to age 65, it’s a great time to start learning some Medicare ABCs, and start planning for it. Get familiar with the medicare.gov website, which is full of useful information, but hard to navigate. Many people think their health care in retirement will be free or close to it because of Medicare. Here is some bad news for you: Medicare is subsidized, but not free. The average individual on Medicare (husband and wife file separately) is estimated to spend about $150,000 ($300,000 for a couple) over the course of retirement on health care expenses, factoring in premiums, deductibles, and co-insurance. And if you don’t enroll before your 65th birthday—lifelong premium penalties may apply.
Give it Away
The holidays are a time of giving, and a donation to a qualified charity can reduce your taxable income as an itemized deduction. More importantly, it helps you achieve important philanthropic goals.
The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) passed by Congress to provide COVID-19 relief includes a special provision for 2020 and 2021 that gives taxpayers a $300 (individual) or $600 (married filing jointly) special charity deduction. To qualify, the gift must be made in cash and go directly to the charity.
Taxpayers who itemize can generally claim a deduction for charitable contributions, with the deduction typically limited to 20% to 60% of adjusted gross income depending on the type of contribution and the type of charity. The law now allows taxpayers to apply up to 100% of their AGI (adjusted gross income), for calendar-year 2021 qualified contributions.
If you are age 70 ½ or older in 2020 and have traditional IRAs, there is one more way to benefit from charitable donations. You can make distributions directly to charities from your IRA, and the amount directly reduces your AGI, up to $100,000. Reducing your AGI reduces your taxable income and can reduce the taxability of your Social Security benefits. Check this article on Retirement Daily for more ways to donate.
About the author: Massi De Santis
Massi De Santis is an Austin, TX fee-only financial planner and founder of DESMO Wealth Advisors, LLC. DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow, and protect their resources throughout their lives. As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.