Over the next several days, treat yourself to a year-end review. The purpose of this exercise is twofold. First, it’s good business to tie up your loose ends. Second, reflecting on what has transpired over the last 12 months can help you be more effective over the coming year. Let’s see what your year-end review should consist of.
First, let’s look at those loose ends:
1. Tax Loss Harvesting – Turn Unrealized Losses into Real Losses for Some Juicy Tax Benefits
Let’s say you have investments for which the cost basis is greater than the current market value. In that case, you are sitting on a paper loss. But if you sell those investments, you’ll turn that paper loss into a realized loss. You can use those losses against all other realized capital gains. If you don’t have any capital gains to offset that tax loss, you can use up to $3,000 of that loss to reduce your taxable income.
If you really like the investment and are hesitant to sell, don’t wig out. You can always buy it back after 31 days. If you buy the exact same security within 31 days of selling it, you’ll be violating the “Wash Sale Rule” and the tax loss will be disallowed. If you invest using funds or ETFs, you can buy a very similar fund the same day you sell the old security. That way, you’ll be able to claim the tax loss and still protect your position by not being out of the market.
2. Income Tax Projection
You probably did some tax planning throughout the year. But during the year it was hard to really know what your tax liability was ultimately going to be. This is especially true if you receive commissions, self-employment income or bonus bucks at work. Now the year is just about up, and you probably have a pretty good idea about how much income you’re going to declare on your return. Make sure you’ve made appropriate tax payments and/or make it up before 12/31. This way, you’ll avoid nasty tax penalties.
3. Withholding Tax
Along the same lines as the point above, try to make some projections about what you think you’ll earn next year. Make sure you have the appropriate withholding tax set up at work. You probably won’t be able to do this until at least the first week of January, so make yourself a reminder now in case you forget. You should discuss both withholding tax and income tax projections with your tax advisor.
Time to move on to those review items that will help you make next year very effective.
4. Compare Your Net Worth
To be frank, this isn’t a super important review item for me. That’s because I can only control my actions and not the outcomes. I do look at the changes in my net worth, but I don’t let anyone “get all up in my grill” based on the outcome.
I could have spent way too much money and still seen my net worth expand if I was lucky enough to ride a good market. Conversely, I could have done everything right and my net worth could have declined anyway if the market was bad. I can’t berate myself for those things which are beyond my control. I run my financial plan and evaluate my net worth to see:
- Am I on track? If so, why? If not, why not?
- Do I need to change anything about my spending, savings or investing?
I suggest that you put together a very simple spreadsheet with your assets and liabilities. This way it’s easy to update each year and compare results.
5. Compare Budgeted to Actual Savings
This is where the rubber meets the road, Pilgrim. First, make sure you have an easy way to track how much you are saving. (This includes retirement contributions, investments and even those extra payments towards your mortgage.)
All your year-end investment statements will spell out how much money you’ve added regardless of the market value of those accounts right now. Compare what you actually saved against your planned savings. When you look it over, are you on track? If so, can you bump up your savings for next year because of an improvement in your income situation? If you aren’t on track, what do you have to do differently? Is it time for you to launch that side business?
6. Compare Budgeted to Actual Spending
This is closely related to the point above – but slightly different. You might be at a point in your life where additional savings isn’t all that possible or all that important. In that case, it’s still critical to examine what your spending patterns are. I am a huge fan of YNAB (You Need A Budget) because it’s an easy-to-use program that tracks exactly what you spend. You set up budgets and download your data to make sure you are on track. What’s nice is that this software tells you exactly where the problems are – if there are any. Whatever system you use, make sure you have a system in place to give you the information you need.
7. Estate Plan and Life Insurance
If you’ve updated your living trust or will and/or reevaluated your life insurance this year, there is no need to do it again now. But if you haven’t done this recently, now is the time to schedule a review. Do you need to change your trust? Do you have enough life insurance?
I know that your plate is full and your head isn’t really in the financial arena at year end. That’s why I suggest you schedule time to work on this rather than try to take care of everything in the last two weeks. Your estate plan and life insurance are critical. Get it done, but get it done right. Take your time. Schedule a time when you’ll have a good chunk of time to thoroughly review your life insurance and your estate planning documents.
8. Investment Strategy
Your investment strategy is something that shouldn’t change all that often, but sometimes a change is warranted. Consider how much risk you are taking. Is it appropriate? Should you be a bit more aggressive with your investments? Should you throttle back? It’s OK if you don’t have the answers. Schedule a time to meet with your advisor (if you have one) for the first part of January.
What have you been putting off? What one thing did you really want to accomplish this year that didn’t happen? Think ahead 12 months. Pretend you’re looking back on what you’ve accomplished. You finally did that one thing that had a huge impact on your life. You feel great because you had procrastinated for years and the achievement had alluded you for too long. What is that one thing? What can you do today to get the gears in motion to make that dream come true?
What is your year-end review like? What should be added to this list?