For many people, the winter holidays are a time to forget about their personal budget and to focus on celebrations with family and friends, until they wake up on New Year’s Day with a financial hangover and a credit card bill much larger than they expected. With that in mind, we’d like to offer some year-end money tips to help you prepare for new year finances and end-of-year tax planning, so you can get through the season and make next year as prosperous as possible.
What’s so Important about a Personal Budget?
Numerous surveys reveal that many Americans lack sufficient cash or savings to cover an emergency. A poll by U.S. News & World Report this year indicated that 40% of Americans couldn’t cover a $1,000 emergency expense with either cash or savings, while 60% said they had an unexpected expense within the past year.
When you fail to budget for the unexpected, it can lead to all kinds of problems such as cutting back on essential living expenses, borrowing from friends, or creating debt that puts you further behind. That’s why we offer this financial review checklist to help you plan ahead and make the most of what you earn.
Create a Budget and Review Your Spending
If you’ve never created a budget before, now is the time to do so. If you already have a budget, it’s a good idea to review it periodically throughout the year to see how you’re doing, especially as the new year approaches. Start by looking at your household income, plus where you spend your money. You could do this on a sheet of paper, a computer spreadsheet, or a budgeting app on your phone. Try to review your budget every month.
A general rule of thumb for household budgeting is called the 50-30-20 rule. This means that 50% of your income (after taxes) should be spent on your needs, 30% on your wants, and 20% towards savings or paying off debts.
Your needs are things you have to spend money on, such as:
- Housing: Rent or mortgage, plus property insurance and flood insurance (if required).
- Utilities: Water, sewer, electricity, trash collection, and phone bills. This might also include Internet service, especially if you need it for work or school.
- Food: Whatever you buy to prepare at home. Some people include lunches and dinners out in their food budget, although these are more of a “want” rather than a “need.”
- Your wants are things you like to spend money on but don’t necessarily need to. This includes:
- Entertainment, subscriptions, gym memberships, and vacations.
- Luxuries: Restaurant meals, designer clothing, jewelry, and expensive food items.
Your savings include anything you’re setting aside for the future, such as retirement, an education fund, an emergency fund, or a major purchase. It also includes any payments that reduce your debt load, such as making more than the minimum payment on a credit card.
The U.S. Bureau of Labor Statistics reports that food, housing, and transportation costs accounted for 59.9% of household expenditures in the Washington, DC metropolitan area, including Arlington and Alexandria, Virginia, and parts of Maryland and West Virginia. This compares to 62.9% nationwide. Additional cost of living statistics for the DC Metro area are:
- Healthcare: 7.7%
- Entertainment: 4.4%
- Education: 3.0%
- Personal care, products, and services: 1.6%
Of course, all of these expenses are bound to change over time, from inflation and market forces that are beyond your control. That’s why it’s important to review your budget and spending habits to see how you’re doing and if you need to make adjustments.
Look for Ways to Reduce Your Expenses
Part of the reason for a year-end financial checklist is to look for ways you can reduce or eliminate unnecessary expenses. You might start by considering your recurring payments or subscriptions. Many people sign up for a streaming service to watch a particular series or a movie and then forget about it. Consider canceling one or more of your subscriptions or limiting yourself to just one streaming service at a time.
One of the reasons for keeping track of every expense, down to the last dollar, is to analyze your spending habits. If every barista at your local coffeehouse knows exactly what you’re going to order, that could be something you could cut back on. A thermos full of homebrew might not seem as fancy as a coffeehouse, but it could save you a substantial sum over time. The same is true with bringing your lunch to work versus eating out, or cooking at home instead of take-out or food delivery. Keeping track of these expenses throughout the year and analyzing them from time to time can help you hit your financial goals.
Don’t be afraid to shop around for things like your Internet service provider, your car, and property insurance. These are things you need to spend money on, but if you’ve been habitually renewing a policy or haven’t considered your options in a while, it could be worth looking for alternatives, just to make sure you’re getting your money’s worth and aren’t being overcharged. It doesn’t hurt to ask for a discount if you’ve been a customer for a long time.
Maximize Your Retirement Contributions
A general rule of thumb for retirement planning is to have a certain amount of your income saved based on your age, such as having a year’s worth of your annual income saved by age 30. We can further break this down to:
- Three times your income by age 40.
- Four times your income by age 45.
- Six times your income by age 50.
- Seven times your income by age 55.
- Eight times your income by age 60.
According to the Federal Reserve, retirees who receive income from other sources, such as employment, pensions, or investments, were substantially better off than those who relied solely on Social Security and other public income sources. Among non-retirees, most Americans did not feel that their retirement savings were on track. According to the Fed’s data, 46% of retirees had to retire because of health problems, taking care of family members, or a lack of work. That’s why retirement planning is so important, because many people don’t have a choice as to when they retire.
The maximum annual 401(k) contribution for 2025 is $23,500 according to the IRS. Those aged 50 or more can make 401(k) catch-up contributions of up to $31,000 per year. The maximum contribution to an Individual Retirement Account (IRA) is $7,000. Those aged 50 and older can contribute an additional $1,000 per year to an IRA.
If your employer offers a 401(k) plan, try to contribute as much as possible. Your contributions are made on a pretax basis, so the more you set aside for retirement the less you’ll pay in federal income taxes while you’re working. If your employer matches your contributions, try to contribute so that you at least make the most of that benefit.
Get Ready for Tax Season
Just like the winter holidays, tax season often comes around before you realize it—and it isn’t nearly as fun. If your employer withholds your income taxes, you’ve got a head start on this. If you’re a freelancer, part of the gig economy, or run your own business, you’ll have a lot more to consider, such as whether you’ve been making quarterly payments on your estimated income taxes. The IRS has a tax withholding estimator on its website that can help with this. Of course, you may need to consult with an accountant or tax preparer to make sure you’ll be ready before April 15 rolls around.
Check Your Emergency Fund
As mentioned above, many Americans don’t have an emergency fund and would struggle to cover an unexpected expense of $1,000 or more. Financial experts recommend having three to six months’ worth of living expenses set aside as an emergency fund that you could quickly access, such as in a savings account. If you don’t have an emergency fund, make building one a goal for the coming year.
Make the Most of Your Savings
This one ties in with building an emergency fund. If you don’t have a savings account, then opening a savings account can really help you manage your funds. You could set up automatic transfers from your checking account to your savings account, such as once a month or once every paycheck. Many people do this because it makes it easy to save money. They use their checking account for paying bills and covering their expenses, and depositing some of their funds into a savings account makes it less likely for them to spend whatever they set aside. This also has a bonus of earning interest. You might also consider an interest checking account.
Look for ways to maximize your savings. If you’re saving up for something such as a vacation, the holidays, or a major purchase, you could put some of your funds into a certificate of deposit (CD) and earn more interest than you would with a regular savings account.
You could also use what’s known as a CD ladder, where you keep some of your savings in CDs at different terms, such as one-month, three-month, six-month, etc. This way, you could earn more interest with a longer-term CD, and when each CD comes to term, you could re-enroll the funds or use them if needed. A CD ladder lets you maximize the interest on your savings, while making sure you wouldn’t have to wait too long for one of your CDs to come to term, and you can access your funds.
Take a Close Look at Your Debts
Many Americans have some kind of debt, such as student loans, mortgages, car loans, and credit card balances. Part of the budget review process is to help you look for ways to reduce your debts and your interest costs. Put together a list of your debts, how much you owe on each of them, and the interest you’re being charged.
There are a couple of ways to tackle your debt load. You might focus on the smallest balances first, as they could be easier to pay off. You could also target whichever debt has the highest interest rate to reduce the cost of financing your debt. You might also consolidate your debts with a home equity line of credit (HELOC) or a personal loan. Many people choose this option because it gives them just one debt payment to make, and it can often result in a lower interest rate.
Check Your Credit Score
You can get a free credit report every week from AnnualCreditReport.com. This service used to be available once a year, but you can now check your score weekly. It’s a good idea to do this at least once a year to see how you’re doing and to look for any errors or signs of fraud. If you see any mistakes or suspicious activities, you can contact whichever credit reporting bureau lists the information: Equifax, Experian, and TransUnion.
Contact Us for All Your Banking and Lending Needs
We’re here to help you with your banking and lending needs through the end of the year and beyond. For more information, contact one of our representatives by calling 703.436.4740. You can also contact us online or visit one of our locations in Fairfax County, Loudoun County, Arlington County, Virginia, and Washington, DC.
