Make Time for a Mid-Year Financial Checkup

There is an antidote to the anxiety and uncertainty that often mounts as the calendar advances through summer, fall, winter...and inevitably, into tax season. It’s called the mid-year financial checkup, and it won’t require a doctor’s visit, just a quick troubleshooting self-exam to confirm you’re on the right track financially in key areas like credit rating, debt management, tax liability and retirement planning.

“As 2011 approaches its midpoint, the little bit of time it takes to perform such an exam could save you plenty of money and spare you lots of angst later,” says FPA member Philip Herzberg, CFP®. “The benefits are plenty, and you can do it more quickly than you might think.”

Start your checkup by requesting a free credit report from a website such as www.annualcreditreport.com. Then review the report for any inconsistencies or new developments that need addressing. The goal, explains Herzberg, is to nip small issues in the bud, before they become big problems.

Next, assess your debt situation and, if you have significant debt burdens, such as with high-interest credit cards, make paying down at least some of that debt a high priority. “A lot of people don’t realize that paying off a liability, like a credit card with an 18 percent interest rate, can be a better move financially than making a stock market investment that’s going to yield, say, three to 10 percent annually,” says Herzberg.

Take stock of major life changes that have occurred thus far in 2011 — marriage, divorce, the birth of a child, etc. — and, in consultation with your employer’s HR department, have your W-4 tax withholding exemptions adjusted accordingly. Be sure you’re neither overpaying nor underpaying with your withholding, Herzberg advises. Overpaying essentially means you’re giving the Internal Revenue Service (IRS) an interest-free loan with money you could otherwise be putting to constructive use; underpaying could put you on the hook for a major tax tab.

Address your emergency fund to be sure you have adequate liquidity to cover an unexpected event such as job loss. At minimum, says Herzberg, that fund — housed in an easy-to-access interest-bearing vehicle such as a money market account — should contain three to six months of household income. “Even better if you can grow it to six to 12 month’s worth of income,” says Herzberg.

Next,take stock of retirement savings. Maintain or even increase contributions to your retirement account(s), and if your employer offers a matching contribution, “you definitely want to take advantage of that,” says Herzberg. People 50 and older should also take advantage of the opportunity to make “catch-up” retirement plan contributions. Since they’re closer to retirement, tax laws encourage them to make greater plan contributions.

Finally, take steps now to manage your taxes. In consultation with a tax expert or financial planner, determine whether it makes sense to sell certain investments and make monetary gifts to take advantage of favorable capital gains, income tax and gift tax policies before they change, a likely occurrence given the deficit-reduction push in Washington, D.C.

Perform your mid-year financial checkup now and you’re bound to sleep better.