Cleaning up personal finances remains one of the top resolutions every New Year. But we all know what happens to most such self-promises, so here's a month-by-month to-do list to cultivate better financial health.
Your 2023 Monthly Financial Planning To-Do List
January: Organize paperwork. This obvious starting point eludes many. Are your financial documents organized, in paper or virtually, so information is at your fingertips? Your heirs will be eternally thankful if you unexpectedly die or are incapacitated.
February: Consolidate investments. Trim your number of accounts and consolidate all your dormant 401(k)s into individual retirement accounts. Spreading your assets across various brokerage accounts is not smart diversification – it's a recipe for confusion.
March: Follow the money. If you're still working and too busy with your life, you may have a poor sense of your personal cash flow, the money that comes in, and where you spend it. You can't establish how much you save or spend without knowing where you are right now.
April: Tax smarts. It's better to owe your state and the federal government instead of overpaying throughout the year.
Did you fund an IRA for your spouse, max out funding on your defined contribution plan at work or fund your Roth IRA by the April 15th deadline (in 2023, the deadline for filing your 2022 taxes is actually April 18th)? Did you track your losses on your taxable accounts, such as individual and joint investment accounts, bank accounts, and money market mutual funds, to name a few? These moves can qualify you for tax credits.
May: Investment smarts. How much do your investments cost you? Do you know what your insurance agent, 401(k) plan or financial advisor charges? How about the underlying expenses you pay to buy mutual funds or exchange-traded funds?
Are your investments allocated wisely to minimize taxes? For example, do you hold real estate investment trusts in your tax-deferred account? Municipal bonds in your taxable account? How much risk do you take?
June: What are you worth, and why it matters? You can calculate your net worth (all your assets, such as your home and retirement funds, minus all your liabilities, such as your mortgage and credit card debt) in many ways. A sophisticated net-worth calculation projects factors of asset growth such as rates of investments' returns and risk and your rate of saving and liabilities to the end of your life.
Your goal: Minimize the risk of outliving your assets.
July: Insure against risk. Insurance keeps you financially whole if disaster strikes. To cite two examples of policies to review, did you outlive your 20-year term life insurance? If so, you're a winner because you remain alive yet you need to consider more coverage.
Have you considered long-term care insurance, especially if you're a woman with a longer life expectancy than a man? This coverage helps with costs of basic daily needs over an extended time.
August: Retirement planning. This planning starts in your 20s and does not end when you retire. If you're employed, know when you can afford to retire (assuming you're not laid off).
Are you aware of all strategies to maximize Social Security payouts? If retired, are you withdrawing from your accounts in the correct order? (Start with your taxable holdings, then move on to tax-deferred and then untaxed.) Calculating optimal distributions from IRAs and other taxable income sources annually can trim your taxes.
September: Gift wisely. You can give back in many ways to organizations and people you care about with donations of appreciated securities or with payments on college loans or new mortgages. The Internal Revenue Service offers several guidelines on gifting.
Your greatest gift may be taking care of yourself, so you don't eventually become a financial burden to your adult children.
October: Preparing for the inevitable. Engage an estate attorney. If you die without a will, your state of residency distributes your assets with no input from you.
If your estate documents are older than about seven years, refresh them. Everyone needs such estate documents as wills, living wills, medical health-care directives and powers of attorney to stipulate your wishes if you become unable to decide matters yourself.
You especially need these papers if you or your spouse, or both, are uncomfortable with financial matters and your children are younger than legal age.
Also, draw up or re-examine these documents if:
- You're in a second marriage
- You own property in or reside in more than one state
- You're concerned about privacy
- You own a business or
- Your family must consider special needs.
November and December: Reality check. If you followed these steps, you're in the minority of individuals with the tenacity to tackle financial planning.
But you still should engage a professional advisor to check your assumptions. Be realistic about what you can accomplish on your own.
It's important to get your finances right and keep them right all year.
Think Your House is a Good Investment? Nope.
Despite relatively low mortgage rates and dreams of bidding wars, multiple offers and all-cash closings above asking-price, would-be-home-purchasers should be cautious about putting too much money into real estate. While some might disagree, for a myriad of reasons, it's not always a great investment and seldom has been.
Owning your own home – or owning several homes – has long been the American dream. Your home may be your castle, and even your biggest asset, but is it a good investment?
Remember Why You're Buying
Although there are significant psychological benefits to home ownership, the hidden truth is that housing is rarely the best use of your money from a strict investment viewpoint. Although there's certainly an investment component to purchasing a home, the primary purpose of owning is personal use and enjoyment. Part of that includes soft costs – care, maintenance and even decorating – that are part of living in the house.
When you buy a house, you may wind up spending enormous amounts of money not only on upkeep but also on improving and decorating it. Soft costs represent enjoyable expenditures, but people need to keep in mind they are expenses, not investments in the property.
Cost of the House Plus 30%
A good rule of thumb is that it costs as much 30% of the market value of a home to furnish and appoint it. So in some ways, that means you're starting with a 30% loss the day you get the keys.
If you've got a $500,000 home and it costs you $150,000 to get it ready to live in, then you've paid $650,000 for it regardless of what your initial purchase price says. As such, because of the amount of money that homeowners sink into their properties, even if you sell for more than you paid, it is not a sound investment in the true sense of the term.
Think (Again) About Inflation
Additionally, you have to consider the erosion that inflation inflicts on home values. According to Realtor.com, over the past 100 years, real estate prices increased an average of 3.3% annually, while the inflation rate in the U.S. was 3.1%. At times when the inflation rate exceeds the rise in housing prices, you actually lose money. And with inflation currently sitting at 40-year highs, do you think housing prices are going up on average 7-8%?
Of course, we've also seen periods when home prices fall, which means that any inflation is even more harmful. If you hold a home for 30 years and it doubles in value, the nominal value may be twice as much as you paid for it, but the true value in dollars, adjusted for inflation, is often less than you paid.
Houses don't keep pace with inflation very easily, and if they do, by the time you consider the costs of moving in, living there and decorating it, a house is virtually a guaranteed loss. Certainly, there have been periods in history, including very recently, where real estate prices have gone up precipitously, and ownership has been a moneymaker.
What you need to remember, however, is that such times are an aberration. For those folks who experienced it, it was lucky they happened to buy and sell at the right time. But many didn't, and now they own an asset whose value has declined considerably.
Vacation Homes Are Worse
If primary residences aren't a good financial investment, vacation homes are even worse. Vacation homes are purely a luxury. There is no question that renting a vacation home for several weeks or even months a year is a better financial decision.
The reasons are fairly simple: A rental home doesn't become a personal financial responsibility. Despite the cost per day, it's still less expensive than full-year home ownership, and renting allows you to go to different vacation spots each year.
How Much Can You Really Afford?
The median household net worth in the United States was about $70,000, according to the U.S. Census Bureau. This means that half of U.S. households earn less than $70,000. But the median home sales price is $428,700 – which is a 30% increase from the previous year, when the median was $329,000.
Intuition says that it's quite possible that a lot of U.S. households are in the red, meaning their net worth is negative, and they are living paycheck to paycheck to pay the interest on all the nonsense they own, including their homes.
So what that means is that the average American household definitely should not be looking at vacation homes, regardless of current low housing prices. And at the risk of giving blanket advice, many households shouldn't even be looking at owning a primary home, given the real costs. However, we have to acknowledge the incredible psychological enjoyment in having that vacation home in the family, maybe for generations. But it is purely a luxury and not something the average American household can even attempt.
To afford and maintain the family beach house, the owners may need to sacrifice – perhaps by downsizing to a less expensive personal residence. Or by skipping trips to other vacation spots. Then, the psychological benefits of owning a vacation home can outweigh the financial burden of doing so. Although homes for personal and family use are not good investments, that doesn't mean that people should avoid buying homes.
There are intangible benefits to home ownership. You probably like owning and improving a home and the feeling that your family has its "nest." Psychologically, it's worth the expense to you.
That said, you should not buy a home believing that it will make you money. It simply won't.
It's going to cost you money – lots of it.
Talk With Your Financial Advisor
The key to successful financial planning lies in following wise investment strategies, custom tailored to your personal aspirations. And while your financial plan should be tied to your long-term goals, short-term events need to be addressed too.
As your financial advisor, I can help you keep your emotions out of your investing decisions, properly account for inflation, and make sure you're not overly reliant on your house equity. Further, I can help you balance long-term strategies and short-term tactics in order to help ensure that you are accounting for both.
That way you can rest comfortably at night knowing that your money is working for you.