The end of the year is not just a time to celebrate, but also a time to review your finances and see where you stand. A financial review doesn’t just mean taking a quick look at your savings and checking accounts, it means assessing your financial situation and setting goals for the new year.
Why is it important to review your budget?
Reviewing your budget means taking a closer look at your income and expenses over the past year. Many people feel stressed about money, but reviewing your budget gives you a clear picture of your financial situation, which can reduce stress and help you set goals for the new year.
Take a close look at your credit cards, debit cards, and other financial accounts to remember where and how you spend your income.
Determining your spending habits is an important part of reviewing your budget because it gives you an opportunity to consider how you spend and look for ways you can cut back.
Identify areas where you overspent or underspent
When analyzing your budget, it’s a good idea to categorize your expenses into different categories, such as housing, food, transportation, entertainment, and savings. You should also look at the burden and interest on debts such as mortgages and credit cards.
This is especially helpful if you are already following a budget plan. You can compare your actual spending for the year to your budgeted amounts to identify discrepancies.
Look for patterns in your spending. Do you often spend too much money on things like entertainment, take-out food, and eating out? You should also consider your spending habits during holidays and vacations. Do you usually start your vacation or holiday shopping with a budget in mind, only to end up spending more?
Analyzing your spending habits can help you plan for next year with a budget that accurately reflects your financial situation. It’s also something to keep in mind throughout the rest of the year so you don’t stray from your budget.
Evaluate necessities and luxuries:
When performing a financial audit and analyzing your budget, it’s important to distinguish between necessary and discretionary expenses.
Necessary expenses are things that you must spend money on. This includes rent/mortgage, groceries, property taxes, insurance, and car loans and repairs.
Non-essential spending, also known as discretionary spending, includes restaurant meals, food delivery, alcohol, tobacco, streaming services, and entertainment such as movie tickets and sporting events. Expenses related to hobbies or sports, such as gym memberships, may also be included.
If you use credit or debit cards for most of your expenses, it’s very easy to track your spending. Still, many people use household budget apps to manage their expenses. Not only does this make it easier to review and analyze your budget, but it also serves as a reminder of your budgeting goals and helps you stay on track.
personal financial management tools
There are many apps that allow you to easily keep track of your financial situation.
All Union Bank customers have access to our interactive services. Personal Financial Management (PFM) Interface for online banking, budgeting and account monitoring.
By linking external accounts, credit cards, assets, and loans, you can use PFM to create a budget and track your spending habits.
The interface is easy to use and helps you get a complete picture of your finances, including your net worth, budget, trends, debt, and more.
Evaluate your savings
Your savings plan should include an emergency fund and a retirement account. With the right strategy, you can make your money work for you by setting aside something in an interest-bearing account.
The importance of an emergency fund
Everyone experiences unexpected expenses from time to time, whether it’s a medical emergency, car repair, or losing a job. Without an emergency fund to fall back on, many people resort to putting these expenses on credit cards, which ends up costing them more in the long run. run. They may also try to borrow money from family or friends, which can cause tension in relationships.
That’s why many financial experts recommend having three to six months’ worth of living expenses that you can access at any time. savings account You can also earn interest.
retirement account
Even if retirement seems far away, Now is the time to start saving for it.. The longer you save for retirement, the more you can take advantage of compound interest, which increases the amount you invest each year.
If your employer offers a 401(k) plan, you can contribute a portion of your income on a pre-tax basis, reducing your income taxes and saving for retirement at the same time.
If your employer offers matching funds, try to at least meet that criteria. For example, if your employer matches up to 3% of your 401(k) contributions, you’ll be throwing away free money if you contribute less than that amount.
You may also consider investing your funds in: Individual Retirement Accounts (IRAs and Roth IRAs).
As part of your annual financial review, it’s a good idea to review your current retirement account balances and consider whether your contributions will help you achieve your long-term goals.
set financial goals
Researching your finances and putting together a budget can seem like an insurmountable task. That’s why it’s important to break down your goals into smaller pieces that are easier to work on. This includes both short-term and long-term goals.
short term goals
Short-term financial goals are goals that can be achieved within a year. Even though they may not seem important, achieving these goals is critical to building momentum and maintaining financial discipline. Common short-term financial goals include:
save for vacation
Choose where you want to vacation and figure out the total cost of food, travel, accommodation, souvenirs, and more. Calculate how much overtime you need to set aside and divide this total into weekly or monthly contributions.
repay a small debt
Even a small debt can quickly become a large debt if you pay interest on it. There are two approaches that many people use to get out of debt.
• Snowball method: Pay off your smallest balance first (similar to a snowball rolling downhill) before focusing on larger balances.
• Avalanche Method: Pay off debt with the highest interest rate first before tackling debt with a lower interest rate.
Building an emergency fund
Financial experts recommend having an emergency fund that covers three to six months’ worth of living expenses. If that seems like an impossible goal, try aiming for a smaller goal.
Try setting aside a fixed amount, such as one month’s worth of living expenses or $500. Once you have achieved this short-term goal, you can focus on gradually increasing your goal over time.
An emergency fund is a financial safety blanket that can protect you from high interest costs if you have to deal with a budget shortfall using credit cards.
Save for big purchases
When you have a big purchase coming up, you may want to take out a loan or sign up for a credit card. You’ll be better off financially if you can save up for new appliances, a car, or a home improvement project.
You can start by researching what you’re looking for, compare prices, and then create a target amount of money you need to save and a plan to reach that goal within a specific time period. Giving yourself a certain amount of money and a deadline will help you stay on track financially.
long term goals
Long-term financial goals are goals that take more than five years to achieve. It may seem far away, but achieving it requires careful planning and consistent effort.
That’s why it’s important to start with short-term goals that are easier to achieve, and build towards your long-term goals.
Here are some examples of common long-term financial goals.
retirement savings
Building a retirement nest egg takes a long time, but it’s important to ensure financial independence in your golden years. By starting early, you can take advantage of compound interest, which allows your investment to grow as you increase the amount each year.
If your employer offers a 401(k) plan, saving as much as you can can help you save on income taxes, and the interest you earn continues to grow each year.
You can also save for retirement using a traditional IRA or Roth IRA. The main difference between them is when you receive the tax relief.
With a traditional IRA, contributions are tax-deductible, but withdrawals at retirement are considered taxable income.
buy a house
Owning your own home has several financial benefits. It’s an investment that should increase in value, and the mortgage interest you pay can be deducted from your income tax return. Individuals can deduct up to $750,000 of their mortgage debt, and married couples filing separately can each deduct up to $375,000.
To buy a home, research the housing market where you want to live to understand what prices are, where prices are heading, and how much down payment you’ll have to make.
You also need to consider the costs of owning a home, such as property taxes, maintenance, and insurance.
If you are saving for this purpose, you should maintain a good credit score as this will greatly affect your ability to obtain a mortgage and the interest you will have to pay.
At Union Bank, Several types of home loans and construction loans We’ll help you find the best option for you.
funding education
Higher education costs are becoming more expensive, so it’s important to save for tuition and other costs if you or your child want to attend college, especially if you want to avoid student loan debt. Two common ways to save for college are 529 plans and Roth IRAs.
A Roth IRA is an individual retirement account. A 529 plan is a type of college savings plan that is sponsored by the university and state.
More than 30 states allow a state income tax deduction or credit for all contributions to 529 plans, but not Roth IRAs.
The contribution limit for 529 plans is $18,000 for an individual or $36,000 for a married couple in 2024. The Roth contribution limit is $7,000 per year, or $8,000 if you’re 50 or older.
Roth IRAs have no total contribution limits, but 529 savings plans have total contribution limits that vary by state. New Hampshire’s limit is $569,123, and Vermont’s limit is $550,000.
529 plans allow third-party contributions, but Roth IRAs do not.
plans for next year
Re-evaluate your financial plan every year to see where your finances are. Did you achieve your goal? Were your budget forecasts accurate and how closely were you able to achieve them?
Use performance as a baseline for planning next year’s budget and look for ways you can reduce spending.
By reviewing your financial goals and successes annually and setting short-term and long-term goals, you can remind yourself to stay on track and reduce the likelihood of going over budget in the future.
we can help
A year-end household budget check is important for achieving your financial goals. It’s an opportunity to reevaluate where you are, where you need to be, and how to get there.
At Union Bank, we’re here to help you achieve your goals. our asset management The team can help with financial planning, including investment management, retirement strategies, and personal trusts. Not sure where to start? inquiry Or stop by one of our 18 locations in northern Vermont and northern New Hampshire.
