A budget is at the foundation of good personal finance, and if you don’t have one already, it should be your first priority. Don’t just plan for regular monthly expenses either. Rather, look at the big picture. “If we have any debt, have we done anything to manage that?” asks Aaron Bell, a wealth management advisor with Northwestern Mutual in New York City.
In addition to extra debt payments, plan for quarterly and annual expenses such as insurance premiums, vacations and holiday spending. Track your spending by using an app like Mint or PocketGuard. When you hit the budgeted limit for each category, stop buying.
Max out your 401(k) match.
If your employer offers a 401(k) plan, you should contribute as much as possible. Traditional 401(k) plans offer an immediate tax deduction on contributions while Roth 401(k) plans will let you take out money tax-free in retirement. In 2020, the contribution limit to a 401(k) account is $19,500.
Many employers will match a portion of worker contributions, up to a certain amount. “I’m surprised in my practice how many people don’t even put in their 401(k) what their employer matches,” says Steve Azoury, financial representative and owner of Azoury Financial in Troy, Michigan. If you aren’t sure how much to contribute to a 401(k), make sure you’re at least depositing enough to get the maximum employer match.
Consider refinancing your home equity loan.
In the past, homeowners could deduct the interest on home equity loans on their federal income tax return. However, the tax code changes enacted in the Tax Cuts and Jobs Act of 2017 eliminated that deduction for many people. To keep deducting the interest, you could refinance your main mortgage and roll in the balance of the home equity loan.
Even if you don’t have a home equity loan, it may make sense to refinance a mortgage right now. “We are in a historically low interest rate environment,” Lloyd says. To minimize the costs associated with refinancing, see if your current lender offers any streamline options that may waive or reduce fees.
Keep your home equity loan deduction.
Despite tax reform changes, some homeowners might still be able to deduct the interest from a home equity loan. According to the IRS website, interest is deductible for home equity loans and lines of credit that are used to “buy, build or substantially improve the taxpayer’s home that secures the loan.”
Interest on home loans totaling up to $750,000 are deductible for couples and single taxpayers while the limit is $375,000 for a married taxpayer filing a separate return. People should carefully document how they spent the money from a home equity loan so they can justify the deduction if audited.
Refinance or minimize your student loans.
Refinancing student loans could be a smart money move for some people. Extending the loan to a longer term could reduce payments and free up cash while a shorter term will save on total interest cost. However, those with federal student loans need to think carefully before refinancing. Doing so could make them ineligible for government debt forgiveness programs.
If you or a child are heading off to college, avoid taking out loans beyond what is needed to cover necessary expenses. For example, don’t use loans to pay for an expensive apartment when lower-cost housing options are available. “This can lead to a very dangerous situation,” says Lisa Zeiderman, an attorney and board member of Savvy Ladies, a nonprofit that provides free financial education. “I have seen people run up huge school loans that can’t be discharged in bankruptcy and must be paid off.”
Open a 529 plan.
For years, families have opened 529 plans to fund their kids’ college educations. Money deposited into 529 accounts grows tax-free and can be withdrawn without a tax penalty for qualified higher education expenses. Some states, such as Michigan and Illinois, also give a state tax deduction for qualified contributions.
Under the new tax code, money in these accounts can also be used to pay tuition for students in kindergarten through 12th grade. For parents who plan to send their children to a private elementary school or high school, this is one more reason to open a tax-advantaged 529 plan.
Rebalance your portfolio.
After a long period of sustained economic growth, the markets have swung widely in 2020. That means portfolios may now be unbalanced as aggressive and conservative funds have grown and contracted at different rates. Now is a good time to reevaluate fund balances. “That can be the most basic housekeeping strategy (for investments),” Bell says.
For stock allocations, a rule of thumb is to subtract your age from 100; the result is the percentage of money you should consider keeping in equities. However, a financial planner may be able to provide a more nuanced recommendation based on your risk tolerance and personal goals.
Harvest your investment losses.
Investments made outside 401(k) and IRA accounts are subject to capital gains tax, which maxes out at 20%. However, if investments are sold for a loss, that amount can be used to offset any capital gains or income tax. Savvy investors can dump losing stocks and use them to reduce their tax burden.
However, be aware of the wash-sale rule, which prohibits investors, their spouses or their personal companies from buying a substantially identical stock within 30 days before or after a sale. Doing so will eliminate the possibility of a tax deduction for the loss.
Shop for new insurance.
Insurance rates can vary between companies, and it’s worthwhile to shop for new rates every year or two. Compare quotes from several companies to see if cheaper insurance for auto, homeowner and life policies is available. A simple way to lower rates is to raise your deductibles, Azoury says. However, be sure to have a new plan before canceling your old coverage.
Don’t forget you also have an annual open enrollment period to shop for a new health insurance policy. Regardless of whether you get your insurance through an employer, Medicare or the government marketplace, use this time to compare plans and find one with the best network and lowest out-of-pocket costs for your medical needs.
Open a health savings account.
Those with qualified, high-deductible health insurance plans are eligible to open health savings accounts. These accounts are eligible for triple tax benefits. Money deposited into the account is tax deductible, funds grow tax-free and withdrawals are tax-free when used for health care expenses. People with individual health insurance policies can contribute up to $3,500 to a health savings account in 2020. Family plans have a contribution limit of $7,100, and those age 55 and older can make an additional $1,000 catch-up contribution.
Money in a health savings account rolls over each year and can be invested. “This can also help you plan in advance for things like your child’s braces or other items that may be needed in the future,” says Tara Rivera, vice president of finance at DentalPlans.com. “The money will be there when you need it, helping you avoid debt.”
Reassess and negotiate monthly bills.
You’ll have more money in your pocket if you take time to trim monthly bills. Cable, streaming services, cellphone and internet service are all prime places to save, thanks to a competitive market. In some cases, you may not even have to change companies to get better rates. Contact current providers to ask if you can get a reduced price in exchange for your continued business.
Don’t forget to also look for lower prices on financial products. “One of the best ways to save money on debt is to try to take advantage of zero interest alternatives or personal loans if the rate is better than your current credit cards,” Rivera says.
Be strategic with charitable donations.
For the 2020 tax year, the standard tax deduction for a married couple is $24,800. That means not many people are likely to itemize their deductions. Since charitable donations can only be written off by those who itemize, people may have to be strategic about when they give to get a deduction now.
One strategy is to move up donations that would typically be given in January to December. Or taxpayers may find it best to make larger contributions every other year. Just be aware that you can generally only itemize contributions of up to 60% of your adjusted gross income.
Update beneficiary information.
Your loved ones will be grateful if you take time to review beneficiaries. These are the people designated to receive money from life insurance policies, retirement funds and bank accounts after your death. So you’ll want to review your beneficiaries on at least an annual basis.
A beneficiary designation overrides any other directive you’ve given about your finances. For instance, if you divorce and forget to remove your ex-spouse as your life insurance beneficiary, they will get the death benefit regardless of what it says in your will. If a beneficiary isn’t named, an estate may have to go through an expensive and long probate process before the funds can be released to heirs. However, avoiding that headache is easy, according to Azoury. “It could have all been solved by one signature (on a beneficiary form),” he says.
Conduct an annual review.
It’s easier to make smart money moves if you have a good understanding of your overall financial picture. “I recommend couples mark a day or evening to sit down at least once per year to evaluate their assets, liabilities and expenses, including credit card debt, and any investments or retirement accounts they might have,” Zeiderman says.
As part of that process, review your credit reports and credit score. Consumers are entitled to one free credit report each year from each of the major credit bureaus: Experian, Equifax and TransUnion. These can be requested at AnnualCreditReport.com. Meanwhile, credit scores can be checked for free through credit card issuers such as Discover or services like CreditWise from Capital One. Monitoring your credit score and credit reports ensures errors don’t slip through and adversely affect your chances of approval for a loan or lower interest rate. What’s more, it can help you spot identity theft early.
Meet your financial goals with these tips.
- Budget for future expenses.
- Max out your 401(k) match.
- Consider refinancing your home equity loan.
- Keep your home equity loan deduction.
- Refinance or minimize your student loans.
- Open a 529 plan.
- Rebalance your portfolio.
- Harvest your investment losses.
- Shop for new insurance.
- Open a health savings account.
- Reassess and negotiate monthly bills.
- Be strategic with charitable donations.
- Update beneficiary information.
- Conduct an annual review.
