You probably know that I'm a huge fan of weekly money time, but often the work that's done there is down in the weeds: paying bills, allocating income, and general keeping-the-wheels-on-the-bus sort of stuff. So: let's talk about some of the high-level, once-a-year-or-so sort of stuff, shall we?
First question: what to review, and when?
For tech professionals, I recommend considering the following high-level categories:
As to when should you do the review: well, in terms of the day and time, weekly money time is a good space, don't you think? I mean, you've already got the time set aside, no distractions, etc. -- it's ideal!
But in terms of the time of year, I actually recommend you divvy up your annual review into at least 3 different sub-reviews: taxes right after you file them, employee benefits during open enrollment, and the other items during a holiday break or another time when you're generally feeling introspective. Or retrospective. Or circumspective!
But don't wait until you "feel like it" to have the review -- pick a time that's likely to work, and stick to that time. Holiday breaks can be deceptively busy! (No, seriously. Pick a time. Right now. It'll just take a few minutes, and you'll thank yourself later!)
Alright, so we've got the reviews set up. What do the aforementioned reviews look like?
First and foremost, post-filing is a great time to determine whether you're withholding properly.
And what does "properly" mean? Some people will rant over "giving the government an interest-free loan". But honestly, consider a $2,000 refund. If we do back-of-the-napkin math, that's roughly a year of interest at today's rates of ~1.8%, which is a grand total of...$36. Over the course of a year. And that's assuming you kept the money in an online savings account, rather than keeping it in checking -- or spending it!
And consider the emotional/psychological aspects. Prospect theory notes that we tend to feel more pain at a loss than joy at a gain -- so why not minimize the pain we feel at owing taxes? Not to mention the fact that a refund can be a nice forced saving tool, if you have an income allocation plan in place that reminds you where you want your money to go, long-term.
Ultimately, the definition of a "good outcome" here is up to you and your personal situation. But once you've defined said outcome, then you can take a look at your refund or lack thereof and determine if this is what you want to have happen next year. If not, you can tweak your allowances or make estimated tax payments. (Want to know more? Check out the section "How do I not get a sudden shock at tax time?" in this article.)
Also, this is a good time to take a look at the tax efficiency of your portfolio and determine whether there's an opportunity to tax shelter some of your assets. And for your reading pleasure, here's a list of some of the best tax shelters for tech professionals.
Alternately, you may actually find that you're tax sheltering too much: maxing out your IRA or 401(k) is great, but if you go into credit card debt in the process, you are -- and I say this out of love, and with much respect -- doing it wrong!
Employee Benefit Review
Open enrollment is, naturally, the perfect time for going over your employee benefits.
One of the first questions to ask if you're using a flex spending account (healthcare or dependent) is: am I on track to spend my contributions? If not, fix that! It's use-it-or-lose-it, after all, though many companies are now letting you roll over a small amount from year to year, and/or giving you a grace period that goes into the beginning of the following year.
And know that many items that aren't paid for by health insurance are covered by healthcare FSA's: chiropractors, acupuncture, family planning, sunscreen, thermometers, etc. etc. FSA store currently has a great list, if you're curious.
Of course, if you're not on track to use up your FSA, strongly consider reducing your contribution for next year. Tax savings are great, but if you're willing to throw away money for them, well. See above comment about Doing It Wrong.
Now is also the time to take a look at your health insurance, particularly whether a high-deductible healthcare plan -- and, more importantly, the accompanying health savings account -- might make sense for you. Sure, the out-of-pocket expenses from an HDHP may be higher in any given year, but the tax savings from the HSA can make it more than worthwhile...assuming it's used optimally!
Regarding other benefits: in general, if it's something you need, getting it through your employer benefits program is a cheap way to go. This especially includes life insurance and will creation! (Yes, I know you're immortal until proven otherwise, but humor me, would you? Like a parachute, you get exactly one chance to get your estate plan right!)
Your end-of-year review is a great time to go over your portfolio. Now, if you've only got one account (e.g. your 401(k)), this may be a really short review. But once you start changing jobs, contributing multiple accounts, getting married, etc., the complexity will slowly increase over the years, and it's worth taking some time each year to address that!
First: consider simplifying your accounts. Can they perhaps be merged? Many 401(k)'s offer similar low-cost fund options, making the potential optimization often not worth the complexity of keeping a 401(k) at your old employer, and there's always the option of rolling the funds over into an IRA.
Also, are they all unified, pointing in the same direction? Do you have an investment policy statement -- even a simple one -- that outlines your general investment strategy? If not, your annual review is a great time to sit down and come up with one! (Hint: "finding good companies to invest in" might not be the best IPS.)
Finally: if you're not using target-date retirement funds or an investment manager (whether human or computer), now's a good time to rebalance your portfolio. As of this writing, stocks have been on an absolute tear for the past decade, and thus an unrebalanced portfolio is likely taking on a lot more risk than it was ten years ago. To paraphrase Warren Buffett, don't get caught naked when the tide goes out!
Income Allocation Review
I know: "income allocation" isn't nearly as sexy as "portfolio". But I'd argue it's more important -- at least an order of magnitude more so. I've said it before, and I'll say it again: cash flow management is the foundation of financial success.
Now is the time to review your income allocation: is your money going where you want it to? Is money piling up unused in your checking or savings? Alternately, are you getting into credit card debt more than you like? Do you have an income allocation plan in place at all? If not, just as with your IPS, now is the time to fix that.
And even if things are generally going smoothly, now is the time for an incremental bump: for every goal that's either not yet on target or for which you don't really know what the target is (e.g. retirement, or charity), consider raising the allocation towards that goal by e.g. 0.5%-1% of your salary. Ideally, it'll small enough that you barely notice it, but if you do this every year, you'll gain some serious momentum over time!
Depending on your situation, there are other items to look at at your end-of-year review. Sit down and brainstorm your financial picture, and contemplate everything that comes up.
For example, is your home or apartment properly insured? I often recommend replacement insurance over market value insurance, and your annual review is a great time to remind yourself what you have. It's also time to check your home's value versus how much it's insured for; if the latter is less than 80% of the former, you won't get paid the full replacement value should something happen! Similarly, it's worth reviewing your auto insurance and making sure the deductibles make sense.
Also, do you have a handle on your credit score? If not, consider a score monitoring service. I particularly like Credit Karma; the report card it gives is an extremely effective way of figuring out the best way to improve your credit over time!
And if you sit down and find yourself overwhelmed, or at the very least wishing you had a second opinion, well -- I'd be remiss if I didn't recommend finding a good financial planner. Whether you need a comprehensive plan or just someone to point you in the right direction, these days you can get exactly who and what you want!
Britton is an engineer-turned-financial-planner in Austin, Texas. As such, he shies away from suits and commissions, and instead tends towards blue jeans, data-driven analysis, and a fee-only approach to financial planning.