When it comes to spring cleaning, you probably haul the junk out of your garage, scrub your fridge, and wash the rugs and drapes. But don’t forget about your personal finances. Just after tax season is the perfect time to perform an annual evaluation and tidying up of your budget, bank accounts, debts, and investments.
Here are ten steps for straightening up your finances:
Evaluate your debt load. How much do you owe, and how much are you paying the lenders in interest? Comparison shop what you’re paying in interest with what’s available now, and consider refinancing your mortgage or asking your credit card company for a lower interest rate. If you want to take advantage of the 0% balance transfer offers that are all over the place, make sure you’ll be able to pay off the transferred balance in full before the promotional period expires — and resist the temptation to run up new debt on the old card.
Chip away at that debt. The question has always been whether you should you start paying off the balance with the highest interest or knock out the smallest bills first. Although starting with the highest interest rate makes the most sense mathematically, researchers found that people are more motivated to continue with a debt-reduction plan if they knock out a small debt in its entirety rather than merely a chunk of a bigger one. Also known as the “snowball approach” as advocated by personal finance expert Dave Ramsey, paying off one debt gives you the momentum to keep chipping away until that debt is history.
Update your budget. If you’ve undergone a major job-related change like getting a big promotion or switching from two incomes to one, revisit your household budget. If you’d like to have one partner stay home with a child or go back to school full-time in 2013, the best way to adjust to being a single-breadwinner family is to start living like one six months beforehand. This will expose any weak spots in your budget or expenses you’ve overlooked. It will give you a nice addition to your savings cushion, as well.
Tally up your rewards. Credit card points, airline frequent flyer miles — many of these rewards have expiration dates. Go through your various loyalty club memberships, so you can use your rewards before you lose them. If you have to pay a fee to participate (through a credit card’s annual fee, for example), calculate whether the value of the rewards offsets that amount.
Revisit your insurance. Haul out your life, homeowner’s (or renter’s) and car insurance policies. Make sure life insurance beneficiaries are still up to date, and evaluate premiums, deductibles and coverage levels. If you have points on your driver’s license, see if a defensive driving course could help lower your premium. Especially if you have kids, make sure your life insurance coverage is adequate. If you’re in a family with a stay-at-home parent, get life insurance for that spouse, too. A lot of people don’t do this because they only think of life insurance as a replacement for lost earnings, but a surviving spouse can use that money to pay for child care or pay off the deceased’s student loans.
Check your credit report. You can get one free credit report from each of the three bureaus annually. Order them at annualcreditreport.com so you can find and correct any mistakes. The FTC says 5% of consumers have credit report errors that could hurt them financially. When a mistake drags your score down, it can prevent you from getting a credit card or a mortgage, or, you could find yourself paying more than you should to borrow money.
Examine statements for mystery charges. If you don’t do it regularly, go over your bank and credit card statements to make sure you’re not being charged fees you don’t know about, or paying for subscriptions or services you never use. If you see a charge you don’t recognize, it’s a good idea to investigate. Sometimes thieves who traffic in stolen credit card numbers will make a small, innocuous purchase to test if an account is still active before going on a shopping spree.
Evaluate your 401(k) allocations. As a rule of thumb, find the percentage of your portfolio that should be invested in stocks by subtracting your age from 110. Financial planners say people planning for retirement make two big mistakes: They either get scared by market volatility and pile their entire nest egg into ultra-conservative investments, or they get overly aggressive — possibly in the hope of “making up for lost time” because they didn’t start saving earlier. It’s better to think about retirement sooner and take on an appropriate level of risk all along.
Make copies. If you’re one of the growing number of people who gets paperless statements from your bank and credit card company, go online and either save or print out statements for the past year. Most of that information is available for a limited time, and if you need to retrieve it after that, you might have to pay the institution a fee for copies of your statements.
Throw stuff out. Experts advise hanging onto any financial documents that pertain to your taxes for seven years, since the IRS can look back for six years if your income is seriously underreported but the agency doesn’t suspect fraud. The FDIC suggests saving credit card and bank statements that don’t have any tax significance for a year. ATM deposit slips, withdrawal receipts and canceled checks that don’t pertain to your taxes can be thrown out as soon as you’ve verified that the transactions are accurately documented on your bank statements. But hang onto tax-related receipts like charitable contributions made by check or tax payments that you deduct.