End-of-the-Year Personal Finance Checklist for 2021


It is almost time to bid goodbye to 2021. The year has been a mix of challenges and opportunities. With the pandemic settling down and the stock market regaining its old charm, 2021 is ending on a good note. Even though the year brought respite for millions of Americans after the tumultuous 2020, the personal financial situation of most investors has suffered over these two unprecedented years. Hence, before you start decorating your Christmas tree or making plans for the New Year and holidays, pause and reflect on your personal financial situation. Are you sticking to your budget? Are you on track with your savings target? Are your investments performing well? Is your portfolio aligned with your goals and risk tolerance? Has your net worth increased? Are you on top of your estate plan? And lastly, are your taxes optimized?

These are a few personal finance checklist questions you should ask yourself before you welcome the New Year. The end of the year is always a good opportunity to assess your financial situation, make amendments, and strategize for the upcoming year. A detailed review of your personal financial situation can help you identify the financial mistakes of the past that may require rectification. Moreover, with time, your risk tolerance, financial goals, and future expectations can change. Reassessing your personal financial situation can aid you in ensuring your financial plan is in sync with your present desires. Especially if your ultimate goal is to save for retirement, conducting a year-end assessment of your financial situation can help you keep track of your retirement accounts, asset allocation, income sources, investment outcomes, family changes, and important milestones as you approach your retirement age.

Typically, in a year, multiple changes can impact your financial plan. Your asset allocation could be imbalanced, and your portfolio could be less diversified than required. In addition to this, your requirements could have changed, you could be subject to new rules, your estate plan can change, your income flow can increase or decrease, and your family can grow, among several other things. Each factor, irrespective of how trivial it is, can have a significant bearing on your finances. For instance, consider the case wherein you have named your spouse a beneficiary of your 401(k) plan but in the past year, have got divorced and remarried. In this state of affairs, you essentially have to change your beneficiary’s name in your 401(k) plan and will. Failure to incorporate these changes can result in a feud. Alternatively, in another case, COVID-19 could have caused you to consume your emergency corpus to meet the unexpected demands of 2020 and 2021. However, in 2022, you should focus on refilling your emergency nest egg to create a backup for adverse happenings in the future. If you need assistance with how to go about adjusting and managing your finances, consult with a professional financial advisor for advice on how to prioritize your finances and save funds for future emergencies. All these aspects and much more are exhaustively taken care of if you follow some effective end-of-the-year personal finance tips.

Here are some tips that can help you in your personal financial management:

1. Review your budget and savings plan: A new year calls for a new budget. 2021 has been a different year for most Americans. With work from home becoming a corporate norm to thousands losing their jobs due to the pandemic, spending and saving went off track. Most people lived off their savings because of lack of income, and others witnessed an increase in spending, owing to a greater share of time spent at home, resulting in higher electricity and food bills. Hence, saving and spending habits experienced a considerable change in the past year. It would be beneficial for you to create a budget for 2022 and allocate money for your discretionary and non-discretionary expenses. Assess your previous year’s spending with the new budget allocations. Aim to create a zero-based budget, where each dollar has a defined purpose. Any month that you spend less than budgeted, redirect the sum towards your savings. Also, check if you can increase your savings target. If you were saving 20% of your income in the last year, focus on increasing your savings to 25-30% in the new year.

2. Reassess your financial goals: A year is a long time, and several things can change in this period, both professionally and personally. Any alterations in your personal and professional life can have a huge influence on your financial goals. Hence, it is important to revisit your financial goals at the end of the year. For instance, your savings target might be to save for your children’s education. However, if your kid gets a scholarship for higher education, your financial goal may need alteration. You could instead focus on saving for retirement or choose to buy a home, etc. Once you draw close to the end of the year, take time to review your goals. Evaluate your progress and identify any fallouts. Alter any goals, if required. Decipher reasons why you are behind your savings targets, and check if there is anything you want to accomplish before the year ends. The idea is to understand where you stand presently and what is the way forward.

3. Analyze your debt situation: Financial experts often stress the benefit of being debt-free, especially if you are nearing your retirement age. If you are free from debt, you can direct more money towards savings and earn better returns through investments. Hence, at the end of a year, check your progress towards repaying your debt. How much debt do you have compared to at the start of the year? If you have made progress and repaid your debt, see if you can bring it down further in the upcoming year. However, if you have failed to repay your debt or if your loan burden has increased, you should create a comprehensive debt repayment plan for the next year. You could consider cutting down your discretionary expenses like online subscriptions, dining out, etc. You can also increase your income sources by taking up a part-time business, freelancing work, etc. Alternatively, you can go for debt consolidation, where you take a new, low-interest loan to pay off your high-interest debts.

4. Start tax-advantaged investments: Tax-advantaged accounts like a 401(k) and IRA (Individual Retirement Account) allow you to contribute pre-tax dollars. Your money grows tax-free in these accounts until withdrawn. The tax benefits offered by these accounts play a significant role in personal financial management. However, you can contribute only up to a specific limit in these tax-advantaged accounts. For 2022, you can contribute up to $20,500 to your 401(k) account. If you are 50 years or older, you can additionally save $6,500 in your 401(k). These are cumulative limits for all 401(k) accounts in your name. If you leave a job in 2021 and begin another in 2022, your contributions are limited to $20,500, or $27,000 if you are 50 or older. In the case of an IRA, you can save up to $6,000 if you are under 50 years. However, if you are 50 years or older, you can save up to $7,000 in 2022. If you already own a 401(k) or an IRA, aim to maximize your contributions to get the most tax benefits. Assess where you are in 2021, and check if you can redirect some more funds towards these tax-advantaged retirement accounts. It is particularly vital to max out your 401(k) contributions because these employer-sponsored plans also attract equal contributions from your employer, which is typically free money.

5. Consider Roth conversions: If you already have a 401(k) or an IRA, you can consider rolling them over to their Roth counterparts – Roth 401(k) and Roth IRA. Typically, Roth accounts like a Roth 401(k) do not give you tax benefits upfront because you contribute your after-tax dollars. However, it allows your funds to grow tax-free, so your withdrawals are tax-free. Roth accounts are best suited for you if you expect to be in a higher tax bracket during retirement. Paying taxes in the present will mean you do not owe any taxes during retirement. However, Roth 401(k) accounts have certain withdrawal criteria. You can get tax-free distributions only if you hold the account for at least five years. Further, you should be at least 59.5 years at the time of withdrawal. In case of an early withdrawal, you are liable to pay a 10% penalty on the taxable part of non-qualified distributions. However, in the case of permanent disability, beneficiary withdrawals, etc., the early withdrawal penalty is exempt.

6. Rebalance your portfolio: 2021 was a recovery year for the market, especially after the COVID-19 pandemic.Several market changes in the past year significantly influenced your portfolio.Ideally, it is advisable to conduct a year-end check to know if your asset allocation is in sync with your preference. Know your risk appetite and evaluate if the current portfolio asset allocation meets your expectations. For instance, in 2021, you might be inclined to invest more in stocks due to your high-risk appetite. However, given the market volatility in 2020 and the beginning of 2021, your risk tolerance could have taken a hit. You might want to reconsider the stocks you are investing in, or may even consider opting for alternative assets. Monitoring your portfolio throughout the year is a wise strategy as it allows you to adequately rebalance your portfolio at the end of the year. Rebalancing allows you to create a portfolio that suits your comfort level and new financial goals. For instance, if you are nearing your retirement age, rebalancing will enable you to invest more significantly in safe securities that assure a stable income stream. If you have a considerably long period until retirement, you can rebalance your portfolio to invest in stocks and other high-risk, high-rewarding securities. Reassessing your investment portfolio will give you the chance to phase out consistently non-performing assets and tap lucrative opportunities. However, it is imperative to know when to make a move in the market. You can sell your loss positions in the market to offset market gains. This will also help you lower taxes on capital gains. Any tax-loss harvesting tactics are successful only if applied before the last trading day of the year, December 31, 2021.

7. Reanalyze your tax status: Your comprehensive personal finance checklist includes assessing your tax status at the end of the year.In the previous year, you could have received a salary hike or taken withdrawals from your retirement accounts, etc. These events can cause an influx of money, exposing you to a higher tax bracket. Further, an inheritance received can also impact your tax status. Hence, at the end of the year, it is critical to examine your tax status. Understand if you are paying less than your due in taxes and what you can do to prevent owing the IRS (Internal Revenue Services) for tax underpayment. Further, evaluating your tax status will help you devise effective tax management strategies. You can identify methods to lower your tax bill, such as maximizing your retirement tax-advantaged account contributions, investing in a Health Savings Account (HSA), opting for tax-free insurance plans, using tax-loss harvesting strategies, and more. Further, extreme strategies like moving to another tax-friendly state or creating a tax-efficient estate plan can also help lower your tax burden. Reviewing your taxes at the end of the year is especially crucial if you are self-employed, as your tax rules differ from salaried individuals. If you have made any quarterly or advance tax payments, check your dues.

8. Evaluate your insurance plans: A personal finance tip that most people forget is checking their insurance policies. Generally, you tend to renew your insurance plan each year without assessing if the insurance policy is relevant to your present life stage and requirements. Hence, it is advisable to review your insurance policies (car, home, business, life, etc.) at the end of the year to know if they still are suitable for your case. Also, shop around and check if you get better rates for insurance policies. For instance, if you got married last year, you should reassess your life insurance plan to understand if the sum assured is sufficient to account for your growing family needs. Further, you can consider updating the nominee for your life insurance policy. In case you were a smoker and quit smoking in the past year, you can appraise your life insurance provider and get discounts on renewal premiums of your life insurance plan. Alternatively, if your home increased in value in the previous year, it may be wise to update your home insurance policy to reflect the new value of the house. If you are near your retirement, you should also assess if you have sufficient health insurance coverage and lifetime care insurance, a necessity for a secure retired life.

9. Stay on top of estate plans: Any personal finance checklist is incomplete without accounting for your estate plan. Irrespective of your wealth status, estate planning is critical for all. Estate planning is helpful for your family after your demise and beneficial in matters when you are alive. For instance, creating an estate plan enables you to list directives for life situations like physical or mental incapacitation. It is vital to have a will, no matter your life stage. Your will should explicitly list your estate distribution among your beneficiaries and address relevant issues, such as guardianship for minor children, living trust, appointing trustees, medical directives, and more. An estate plan allows you to control how your assets are passed, distributed, and used by your beneficiaries after your demise. At the end of the year, reassess your estate documents and check if you need to change anything. Also, make sure you list beneficiary details clearly with their legal names. Further, your will beneficiaries should match your retirement account nominees. If there is a discrepancy in your will and account nominees, your estate will be subject to probate and legal issues. Also, reevaluate your estate tax bill and consult your financial advisor to get the best financial advice to minimize the estate tax burden.

10. Review taxes: Taxes are a critical component of your personal financial management plan. Each year, several aspects can impact your tax status. For instance, a hike or fall in your salary could change your tax bracket. Further, if you change your state of residence, your tax liabilities will alter. In addition, modifications in tax laws can influence your tax bill. Amendments in retirement account rules can also impact your tax liability for the upcoming year. For instance, any change in withdrawal rules, contribution taxes, income limits, eligible exemptions, etc., can amend your tax status. Further, charitable contributions, tax-loss harvesting strategies, tax-free gifting, etc., can also considerably impact how much you end up paying in taxes.