The holiday season is often filled with family and fun. Ringing in the new year is the crowning event of an enjoyable season. As the new year rolls around, it’s also a great time to set yourself up for financial success.
With the right financial moves, you can create smoother sailing in the year ahead. If you aren’t sure where to get started with preparing your finances, you are in the right place. We’ve created a checklist to help you breeze through the steps of preparing your finances in the new year.
How to Prepare Your Personal Finances for the New Year
As the end of the year comes around, it’s a useful time for reflection across many areas of our life. Of course, many of us reflect on our progress toward health and happiness over the last year. But it’s also a good time to assess your financial situation and set financial goals for the coming year.
Check Your Credit
A credit score is a three-digit number that can have a big impact on your financial life. Essentially, your credit score is a reflection of your credit report. If you have good information on your credit report, like on-time payments, this leads to a good credit score. But if you have a spotty payment record or otherwise mismanage your credit, you’ll likely have a lower credit score.
A good credit score can be a boon for your finances. Not only will it help you gain access to more attractive financing opportunities, but it may also help you save money across other bills, like insurance premiums.
The first step to building a good credit score is to see where you stand. Luckily, there are ways to check your FICO score for free.
Determine Your Net Worth
Your net worth offers a snapshot of the current state of your finances. Running the numbers on your net worth is a helpful exercise. You can calculate your net worth by subtracting the sum of your liabilities from the sum of your assets.
Liabilities include what you owe, like credit card balances and car loans. On the other hand, assets include what you own, like the equity in your home, cash in a savings account, investments, and more. If your liabilities outweigh your assets, then you’ll have a negative net worth, but if you have more assets than liabilities, you’ll have a positive net worth.
Here’s an example of how to calculate net worth. Let’s say that Sally has $1,000 in credit card Debt, $15,000 in student loan debt, $15,000 in a savings account, and $2,000 in an employer-sponsored retirement account. By adding the $15,000 of savings and $2,000 of investments and subtracting the $15,000 in student loan debt and $1,000 of credit card debt, we can see that Sally’s net worth would be $1,000.
In general, it’s helpful to set net worth goals for yourself as a part of your financial plans. As you move through the years, revisiting your net worth can help you monitor your progress.
Review Your Spending
How you spend your money has a major impact on your financial future. However, it’s easy to lose track of what you spend your money on. You likely know the big costs in your budget, like rent or a car payment. But you might not know exactly how much money you spent on food or fun this year.
Reviewing your spending can give you a clear understanding of where your money is going. If you spend with a credit card or debit card, adding up the total spent should be as easy as combing through your bank statements. But some credit card issuers make it easier by offering spending reviews for you.
Hopefully, you’ll be pleased with your spending choices. But for most of us, this exercise will illuminate an area that has room for improvement. For example, you might realize that all of your takeout nights are taking up too much of your budget. Or you might determine that you are spending too much on subscriptions that you don’t use often.
Plan For Next Year’s Expenses
As you look into the next year, you might have an idea of some of the big expenses coming down the pipeline. Depending on your situation, you might foresee moving costs, a vacation, a down payment on your next car, or a big holiday gift. Regardless of the expenses coming your way, map out a plan to save for them.
If you have a timeline for these costs, try to break out your savings needs into weeks or months. For example, let’s say you want to plan for a $1,200 vacation in 6 months. You’ll need to save $200 per month to make that goal happen.
Make a Plan to Improve Your Credit
Once you have an idea of where your credit score stands, you can decide on the next steps. If you are looking to improve your credit score, you might start by making on-time payments a priority or paying off high credit card balances.
As with most things in personal finance, improving your credit can take time. Instead of looking for immediate results, implement smart credit management strategies. For example, building a record of on-time payments will have a positive impact on your credit over time.
Create Your Personal Finance Budget
A budget is a cornerstone for a successful financial future. Although many see budgets as a constraint on their spending, it’s helpful to look at a budget as a useful financial tool. The long-term implementation of a well-thought-out budget can set you up for a comfortable financial life. Without a budget, it’s easier to overspend on things that don’t necessarily matter to you.
A budget should include everything from your basic needs to your long-term savings goals and hobbies. For example, you might decide to allocate $100 per month to your favorite hobby. But this choice might require giving up $100 in spending on takeout.
When you lay out a budget, it’s easier to see how your spending can help you reach your financial goals, or prevent you from making any progress. As you build your budget, try not to be too restrictive on your spending. For example, if you love a particular hobby, don’t completely eliminate it from your spending. Instead, find ways to trim back in other ways so that you can continue to spend on something that brings you joy. If possible, build a budget that aligns your spending with your values.
Make a Plan to Pay Down Debt
Debt is sometimes a necessary part of building a life. For example, most Americans simply cannot purchase a house or vehicle in cash. When it comes to these big-ticket items, taking out debt provides a pathway to continue moving through life. However, debt puts a strain on your finances.
The good news is that it may be possible to pay off your debt early. If you dream of saying goodbye to your monthly payments, then start making a plan to pay down your debts.
Most choose between the snowball and avalanche methods when paying down debt.
The snowball method requires paying off debts in order from the smallest balance to the highest balance. As you eliminate debts, you can roll its monthly payment to your debt snowball for the next largest debt. You’ll tackle bigger and bigger debts as the snowball grows.
The avalanche method puts a focus on the debts with the highest interest rate. You’ll start by paying off the debt with the highest interest rate. As you eliminate debts, you can roll the monthly payment into your debt with the next highest interest rate.
Although the avalanche method is more mathematically efficient, the snowball method might provide more psychological wins along the way. The reality is that following through on either method will lead to a debt-free status. With that, getting started is more important than choosing the “perfect” method.
Start an Emergency Fund
An emergency fund might be the most important point on your personal finance checklist. The last few years have driven home the point that life can throw unexpected curves your way at any moment. We can’t know what life will throw our way next. But we can prepare for the unknown by building an emergency fund.
An emergency fund is a stash of cash that you can fall back on to cover unexpected expenses or recalibrate after a change to your income. Typically, experts recommend keeping between three to six months’ worth of expenses saved in your emergency fund. For example, a household spending $2,000 per month would ideally have an emergency fund of at least $6,000 to $12,000 on hand.
Of course, building up these savings is easier said than done. But it might be worth making this a top priority for your finances next year. When you have an emergency fund stocked up, you’ll be able to handle a lot of the unexpected costs that life throws your way. For example, if your car needs replacement parts, you can pay for them without going into debt. Or if you lose your job, you have a few months to figure things out before you need to resort to your credit card.
Get Ready for Tax Season
Tax seasons can go more smoothly if you gather the necessary documents ahead of time. A few of the documents you need to collect include your income forms, business expenses, last year’s tax returns, educational expenses, and a record of your tax-deductible transactions.
As your employer sends tax documents your way, collect them in a special folder to make tax season easier. If you know that you’ll owe money to the IRS, set aside the necessary funds in a special account. You don’t want to accidentally spend the funds you owe to Uncle Sam.
Review Your Insurance Coverage
Insurance policies protect your financial situation. Although your premiums might be a big line item in your budget, the coverage is often a worthwhile safeguard for your finances. For example, car insurance can help you cover the repair or replacement costs for your vehicle after an accident.
Take the time to review all of your insurance policies to make sure you have enough coverage. A few of the common insurance policies you might need include health insurance, car insurance, homeowner’s or renter’s insurance, life insurance, disability insurance, and long-term care insurance.
In addition to making sure that your policies provide enough coverage, you should review the premiums tied to your policies and look for any discounts. Shopping around for your insurance policy can often lead to savings. Typically, you can lock in a lower premium by raising your deductible. But don’t raise your deductible higher than what you can reasonably afford to pay after a claim.
Consider Long-term Savings Goals
Last but not least, the beginning of the year is a good time to assess your long-term savings goals. Typically, long-term savings goals include things like building a retirement nest egg or saving for a home purchase. Although most of us hope to retire, it’s often challenging to stay on top of your savings plan.
At the start of the year, reassess your savings goals. If you don’t have long-term savings goals, now is a good time to set them. If you already have savings goals, monitor your progress over the last year to see if you’re on track to meet your goals or if you need to reassess your approach.
Frequently Asked Questions
You have questions about preparing your finances for the year ahead. We have answers.
How Can I Improve My Credit Score in the New Year?
The new year represents a fresh start for many areas of your life. But the information on your credit report will carry into the new year. There are many ways to improve your credit score. But some of the most effective strategies include making on-time payments a priority, paying down high-balance credit cards, increasing your credit limits, and credit piggybacking.
Find more information on building credit in our full guide to credit hacks.
What Is the 50/20/30 Money Rule?
The 50/20/30 money rule is a budgeting method that can help you maintain healthy spending boundaries. According to the rule, you can spend up to 50% of your income on necessary expenses like housing and transportation. 20% is dedicated to repaying debt and savings, while the remaining 30% is allocated for discretionary spending.
When you implement this money rule, it can help you stay on track toward major financial goals.
The Essential Personal Finance Bottom Line Check-in
The start of the year is a good time to run through a personal finance checklist. With the right attitude, you can check off all of the items on this list. Although some of these tasks might feel like a chore, preparing for a financially successful new year starts with the items on this checklist. Get started today!
