How to Perform a Year-End Evaluation of Your Finances


1 December,2015

Now that the year is almost over, it’s a good time to look back on your finances and see how you’ve done. Understanding where you’re at, and where you want to go next, can help you make better decisions about the future. As you close out this year and prepare for another year, here’s how to perform a year-end evaluation of your finances:

Review Your Spending

The first step in any evaluation of your finances is to review your spending. Hopefully, you use some sort of software that helps you track your money. I know a lot of people like using I’m partial to Moneydance, since the demise of Quicken 2005 for Mac. There are a number of other great options, like Personal Capital and YNAB, that can help you manage your money and track your spending.

Even if you haven’t been properly tracking your spending, you can still get an idea of where your money has been going. Go back through your bank statements to see where you have spent money. Look for patterns. Do you spend a lot on dining out? Are there a lot of charges related to entertainment? Do you feel like a lot of money is going to things like gas and groceries?

If you haven’t been tracking your spending, now is the time to start. As part of your evaluation of your finances, recognize that you need to figure out where your money is going so that you can pinpoint where you can improve, and how you can boost your ability to make the most of your financial resources.

After you know where your money is going, be honest about the situation. Are you spending according to your priorities? Think about what really matters to you.  Does your spending match what you’ve done with your money? My priorities center around making sure that my future and my son’s future are as secure as possible. Then I look to make sure that we can enjoy life in a way that works for us. That means experiences, like travel and trying new things. Sometimes, when I look at where the money has gone, and see that I bought another trinket I don’t care about, I feel regret because that’s money that could have contributed to a different experience.

As you review your spending, don’t forget to review your priorities and think about your legacy. Identify the problematic spending and make goals to reduce it, and move that money into something that is more fulfilling.

Assess Your Progress

Don’t forget to assess your progress. This is especially important if you have been working to build your retirement fund or pay down debt. Honestly compare where you stand now with where you were at the beginning of the year.

If you’ve been working on paying down debt, consider how much you’ve gotten rid of. Are your credit card balances lower now than they were at the beginning of the year? Are you making progress on your other debt-paydown goals, including student loans, car loans, or other debt? Celebrate the success you’ve had.

Look at your progress in other areas. I’ve been working on better establishing a travel fund, as well as boosting my retirement contributions and adding to my son’s 529. My progress on all of these goals has been satisfactory. While there have been some hiccups along the way, I’ve employed strategies to help me increase contributions to my various goals. While I probably could have done better, I’m pleased overall with the improvements I’ve made.

When you assess your progress, celebrate how far you’ve come. This is important when it comes to maintaining your motivation. After acknowledging your success, evaluate what you could have done differently. In my case, most of my setbacks this year centered around the fact that my husband asked for a divorce and I found myself moving across the country to get a fresh start — and that sort of thing costs money. I can see how I could have done a few things differently, though, and I’m ready to move forward making some changes.

As you review your spending and assess your progress, you’ll be able to see some of your missteps, understand what you did right, and make better money plans for the coming year.

Estimate Your Taxes

It’s possible to estimate your tax situation. Look at where you stand in terms of taxes, and think about what you might owe, as well as what you’ve already paid. Think about the deductions you can take now, as well as some of the planned deductions you might be able to take.

From business tax deductions to deductions for child care or to deductions for charitable donations or tax-loss harvesting, you can find ways to reduce your tax liability. It’s also a good time to review some of the things you could have done better to reduce what you owe in taxes. Where there some ways to spread out the deductions in a way that was more manageable? Could you improve on your retirement goals while at the same time reducing tax liability by opening a different tax-advantaged account?

Don’t forget, too, that you might be looking at a bigger refund that you strictly need. Unless you have trouble saving money and your tax refund is a sort-of forced savings plan, there is no reason to give the government an interest-free loan for the year. It might be time to adjust your withholding and to take other steps to change the way you handle taxes. If you need help with this step, there is nothing wrong with consulting a knowledgeable accountant or other tax professional.

Check Your Insurance Coverage

This time of year is also known as open enrollment for health insurance. It’s a good time to review your insurance coverage and make sure that you still have what you need. Are your coverage amounts reasonable when you consider your needs? Should you change your coverage so you have more or less coverage?

If you have homeowners insurance, you need to think about whether or not your home has increased in value in recent years. You want to increase your coverage if your home has appreciated and your current plan wouldn’t adequately replace the house. For renters, making sure that your policy will cover the theft, damage, or loss of your possessions is important. If you have bought new, valuable items, you need additional coverage.

The same is true of auto insurance and life insurance. Changes in your family and financial situations might mean that you need to make changes to your policies. You might need to purchase more life insurance, or change the beneficiaries listed on your policy (this is also true of your retirement account).

Think ahead to potential changes. In two years, I’ll have to think about adding my son as a driver on my car insurance. It’s a scary thought, and one that I need to prepare for.

Insurance is designed to help you protect your assets in a manageable way. While you may chafe at paying the premiums, think about how much worse you’d feel if you suddenly needed to come up with a large chunk of capital at once in order to get back on your feet or account for something you missed. From considering which insurance policies you need (perhaps it’s time to add disability), to changing your coverage, review the year and think about how you can better protect your family and your possessions.

Savings and Investing Goals

Finally, think about where you stand in relation to saving and investing. This includes looking at your retirement situation. If you’ve never performed a retirement needs assessment, now is a good time. Think about what you want your retirement to look like, and estimate what you might need to make it happen. There are a number of great retirement calculators out there that can give you an idea of how much you should set aside each month in order to reach your goals.

One of the best things I did was start a travel fund. I set aside a certain amount of money each month, designed to accumulate for major trips (I usually have enough money available for modest weekend getaways and camping trips without special savings arrangements). Like my emergency fund, my travel fund is kept in a taxable investment account.

Consider how you paid for your bigger purchases and goals, and think about how you can better utilize your savings to reach your goals. Even if you don’t have the same level of risk tolerance that I have, you can still find ways to set aside money to reach your goals. Use your priorities to determine which items you want to save up for. I’ve discovered that I can make a big difference in the way I handle things just by switching up the way I save.

Don’t forget to review your current investments as well, especially when it comes to retirement. Rebalancing your retirement portfolio is an important part of staying on track with your money and preparing for the future. This principle can be used in other financial planning as well. Depending on how close you are to your goal, your plans, and your risk tolerance, you need to change things up. I changed the makeup of my travel fund after seeing that it was too volatile for something that I planned to tap in six months to a year. I still include stock funds, but the percentage involved is smaller.

Think about your goals and be ready to adjust your saving and investing plan to match.

Get Professional Help

Finally, don’t turn your nose up at professional help. Fee-only financial planners can take a couple hours to help you get a handle on your situation and move forward. In some cases, it can be very helpful to get another opinion, and a fresh set of eyes to help you with your evaluation of your finances.