10 Steps to Financial Health in the New Year

Dear Readers,

How do you feel about the New Year? For me it's a time of looking back as well as looking forward. Especially when it comes to financial security, the New Year is a perfect opportunity to review what you've accomplished—and what you still want to achieve. And it's the ideal time to recommit to getting on top of your finances. But don't just make a resolution; make a plan. Need a nudge to get going? Here are 10 steps that can put you on the right track and help you follow through all year long.

1. Take stock

You can't make meaningful financial changes in the New Year unless you know where you are right now. A good place to start is with a snapshot of your overall wealth, otherwise known as your net worth. Add up your assets (what you own); then subtract your liabilities (what you owe). This will show you whether you're in the plus or the minus, help you plan and prioritize your spending, saving and investing, and provide a benchmark against which you can measure your progress over the years. This is also a good time to review your credit report to make sure your accounts and liabilities are listed accurately.

Finally, look at your cash flow over the past year. What came in each month? What went out? If you regularly spent more than you earned, decide what changes you'll make to turn things around.

2. Set goals and prioritize

What's at the top of your list of goals this year? Whether you want to save more, pay off debt, start a college fund or help a family member, prioritize those goals so you have a clear idea of where to put your money first. Whatever your other goals, don't neglect regular contributions to your retirement accounts!

3. Spend mindfully

Now create a budget that will support your current living expenses as well as your future goals. Itemize monthly expenses, both essential and nonessential. Make sure any top priorities such as savings or debt reduction are included in your list of essentials. When you make a spending decision, make it in the context of your goals. And if you spend beyond your budget, do it with a conscious understanding of how you're going to reduce your future expenditures so you don't fall into more debt than you can handle.

4. Plan for the unexpected

Make sure you have the right type and amount of insurance. Health insurance is a must, as well as automobile insurance if you have a car and homeowner's insurance if you own your home. Also consider life, disability and renters insurance, depending on your circumstances. Likewise, consider an umbrella policy if you have substantial assets.

Build an emergency fund in an easily accessible account ideally with enough cash to cover three-to-six months' essential expenses in case of a job loss or illness. Don't touch this money except in an emergency.

5. Invest like a pro

Review your portfolio at least twice a year and rebalance yearly to make sure you're still investing according to your goals and timeline. If you didn't do a year-end review last year, start this year by looking at your asset allocation and making whatever changes are necessary to keep your investments on track. Take advantage of online tools and quarterly reports that may be available from your broker. If your investments have grown beyond your own management comfort level, seek out a financial advisor.

6. Set up support systems

Make day-to-day financial management easier by putting as much on automatic as possible. Use auto pay for recurring bills. Consider automatic deposits to savings and retirement accounts.

And don't forget about personal support systems. If you need more reinforcement, consider setting up regular meetings with an advisor or other financial professional who can provide added insight and guidance.

7. Optimize your resources

Use the New Year as a motivation to review employee or government benefits that may be available to you. Are you eligible for a pension from a former employer? Could you get better insurance coverage through a spouse's plan? If you're approaching retirement age, think carefully about the best time to file for Social Security.

It's also a good idea to periodically review the professionals you work with—your accountant, attorney and financial advisor—to ensure they're still meeting your needs.

8. Create your legacy

You may not need a complex plan, but at least create a simple will, especially if you need to appoint a guardian for minor children. Beyond that, think carefully about how you'd like your assets to be distributed and work with an attorney to prepare the appropriate documents, including an advance health care directive. And be sure to review and update beneficiaries on retirement accounts and insurance policies.

9. Open up communications

If you haven't regularly included your spouse or partner in financial decisions, now's the time. Share your priorities, budget and documents as appropriate so that everyone in your family is onboard and willing to do their part. It's easier to change habits when everyone involved supports one another and is working toward the same purpose.

10. Stay involved

Steps 1-9 will help put you on the path to greater financial health this year, but to stay on track, you have to remain involved. Put reminders on your calendar to help you pay bills on time and check on progress towards your goals. Review your budget periodically and make changes if necessary. Talk to your family regularly to keep everyone up to date and motivated. And be sure to measure your success.

Most importantly, make these steps the foundation of good financial management not only this year, but every year.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.