How To Do a Mid-Year Financial Checkup – Things to Think About This Summer

Most people really take a good look at their finances at two main times throughout the year: the very end or beginning of the year and come tax time. While these are great times to focus on your finances it is important to remember that the year is long and your life and the world around you is constantly changing. Since we are closing in on the first half of 2009 already it is a great time to review some key financial items now before the end of the year is upon us.

Between the recession, possible job losses, poor investment returns and everything else that might be going on in your life, there isn’t a better time to check up on your finances than now. That way if you do spot a problem you’ll hopefully catch it early enough that making changes isn’t too difficult.

1. Review Your Goals and Progress

If you are like most people you probably set some goals early in the year either part of a new year’s resolution or just trying to get a fresh start on something. Have you stuck to achieving those goals? Have you been regularly tracking your progress? If the answer is no, this is a great time to revisit the goals and to see where you stand.

Was your goal to reduce debt? Increase savings? Get a raise? Buy a house? Whatever your goals are it is important to keep tabs on them and track your progress. We live busy lives and it is all too easy to get caught up in other things. There are a few steps you can do to get back on track:

Identify Your Goals – If your goal was to reduce your credit card debt by $5,000 this year, write it down. If you wanted to build up an emergency fund that could cover two month’s expenses, write that down. It is one thing to have goals in the back of your mind but it is something entirely different to physically write them down. Take a moment to identify the goals you had set and write them down. Also, remember that a lot of things may have happened over the past six months and you may have some new goals to add. Better to add them now rather than waiting until next January.

Track Progress – Once you have clearly identified your goals you have to track your progress. You need to have a gauge to measure success or it will seem very difficult to accomplish what you have set out to do. Since we are at the halfway point in the year it can make measuring this success a bit easier. Back to the reducing debt by $5,000 example, you should be able to look at your situation and hopefully find your debt at around $2,500 lower at this point. If it is lower you know you’re well on your way and if it is higher it can signal something that needs more work.

Take the Next Action Steps – Identifying your goals and tracking your progress are the easy parts. Taking the action necessary to reach these goals is often the most difficult. If you are falling a bit short in reaching one of your financial goals at the midpoint in the year this is a perfect time to make adjustments. It is easier to make small changes in July to get you back on track for the year than it is to find out come January that you were way off the mark. Whether it is saving more, spending less or anything else it is much easier to make small changes along the way rather than more drastic changes less frequently.

For more detailed information about the importance of setting goals and creating a plan to achieve them I encourage you to check out number 23 in the list of 24 signs that you could be in financial trouble: A Lack of Well-Defined Goals and a Plan to Reach Them.

2. Review Taxes

Review Withheld Taxes YTD

If you are employed this can be as easy as looking at your latest pay stub and looking at the total amount of federal and state taxes that have been withheld so far this year. This is important because over the past six months you may have had something occur in your life that could put you into a position where you end up over or under withholding. If nothing has changed from last year you can pull out your 2006 return and compare to see how close you are.

Make Changes if Necessary

If something will be happening or has already happened that can change your tax liability this year this is a perfect time to make changes. Maybe you recently bought or sold a house, received capital gains, began saving for retirement or college, or even have a sizable charitable donation. Whatever the case may be it is a good idea to plan for them now so you can avoid a surprise when doing your taxes at the end of the year.

Check Your W-4 Exemptions

I usually recommend that everyone review their exemptions at the beginning of each year but it can be something that is easy to forget. If you didn’t make any adjustments this year you can quickly run through the IRS withholding calculator to determine what you should be filing. As with everything else in this mid-year checkup, it is easier to spot problems and make small changes with six months left as opposed to being surprised when it is too late to make any adjustments.

3. Reviewing Investments

One of the questions I’m frequently asked is when is the best time to make investment changes in a portfolio. As with most financial decisions there isn’t a concrete answer that works for everyone since each individual scenario will determine what course of action to take. I know some people who make adjustments on a monthly basis while others will leave things alone for decades. Whether you make frequent changes or rarely touch your investments this is a good time of year to at least do a checkup to make sure things on still on track. If you’re looking to do some fund research I’d recommend Morningstar. It’s free!

Asset Allocation and Target Date Funds

If your core holdings are in an asset allocation or target date fund you have a pretty easy review. Since these funds are designed to keep a specific allocation and/or to adjust their holdings automatically over time there is a good chance that you won’t have to make any changes. What you do want to do though is to take a look at your holdings and make sure nothing has changed. Here are some things to look for:

Expenses: Has the fund kept expenses steady from last year or have the managers made changes?

Portfolio: The mutual fund business is competitive and managers can sometimes take measures to try and boost performance. This is a good time to check and be sure the fund is still investing in the way you thought it was.

Performance: How has the fund performed relative to its peers? If you are noticing significant under performance or if it is significantly outperforming its peers that should be a red flag to check and find out why.

If your core investments consist of target date or asset allocated funds you generally don’t want to make frequent changes to them. They were designed to minimize risk while maximizing returns over the long term so trying to make frequent adjustments will diminish their effectiveness. Use this mid-point in the year to analyze the above points and spot potential problems with those funds and then act accordingly.

Creating Your Own Asset Allocation

Many people take a more hands on approach to investing and pick and choose various individual funds, ETFs or stocks to create an appropriate investment portfolio. This is certainly acceptable, but with this method comes the requirement to pay a little closer attention and possibly make more regular changes.

Rebalancing

The most common portfolio changes are in the form of rebalancing. This simply means that you have selected a specific investment mix, let’s say a 70% stock and 30% bond mix. Over the course of time, depending on the types of returns of the underlying investments your target mix will change. If stocks are returning 15% and your bonds are returning 2% you can find that over the course of a year or so your portfolio is now 90% stocks and 10% bonds, far from your initial target.

So, the question then is how frequently should you rebalance your portfolio? There are two main schools of thought about this and they are:

1. Periodic Rebalancing: A specific interval is set (monthly, quarterly, semi-annual or annually) and rebalancing is done regardless of performance at these intervals.

2. Threshold Rebalancing: Unlike adhering to specific intervals the rebalancing occurs when when the asset mix deviates from the target by a certain amount.

So which one is better? There is no right or wrong answer but rather you should simply use the one that works best for you and that you can stick to. Some brokerage accounts and retirement plans actually have built-in options to set periodic rebalancing intervals. This is a surefire way to make sure it is done on a regular basis. If you do go with periodic rebalancing what is the most appropriate interval?

In my opinion I think that rebalancing more frequently than quarterly is akin to trying to time the market. When you get into making changes on a monthly basis you are operating on a short time frame that is going to be relatively volatile. This could mean from month to month you are buying and selling investments that are experiencing wide swings either up or down. While you will be keeping your portfolio very close to your target allocation at all times, you could also be missing out on realizing some longer term gains.

What is probably more appropriate is quarterly, or semi-annual rebalancing. This longer time frame of 3-6 months is long enough that you can realize some growth in the stock market yet frequent enough that you can make changes that keep your allocation in line with where it should be. Once you move to a year or longer you could find yourself exposed to more risk as your portfolio has become overweight in the outperforming areas of the market, and a quick drop in the market could force you to give up all of those gains you spent so long accumulating.

Threshold Rebalancing

If you’re like me and have a little more time to keep up with your investments you may want to consider threshold rebalancing. With periodic interval rebalancing you are at the mercy of timing. If you choose to rebalance on a specific date each year your timing could be off by just a few days or weeks that could have a significant impact on your overall performance. Although over time this would be virtually insignificant I prefer to let performance dictate my rebalancing, not arbitrary points in time.

With this method you set the deviation from the target as your rebalancing trigger. It may be 5%, 7%, 10% or anything you are comfortable with. This could mean you rebalance every month, once a year, or maybe not for five years or more since it is driven by the underlying performance and the effect it has on your asset allocation.

Determining What is Right For You

This is a great time of year to check in on your investments and see if any changes need to be made. Maybe you haven’t rebalanced in a while and noticed your portfolio mix isn’t what it should be, or maybe you realized your target date fund just changed their investment strategy or increased the expense ratio. Whatever the case may be, use this time to evaluate how your investments are doing, determine if any changes need to be made, and ultimately tie everything back into your goals. Make sure that whatever your investments are that they are a reflection of how you plan on reaching a goal such as retirement, college savings or even buying a house.

4. Christmas in July

Raise your hand if you spent too much money over the last holiday season or if you weren’t able to buy the gifts you wanted to. The holidays are a stressful time and when you need to focus on buying gifts for people and coming up with the money to do so it just compounds the problem. The holidays don’t have to be stressful and since it is in the middle of summer they are probably the last thing on your mind, but now is a perfect time to do something about it.

Start Saving Now

Instead of waiting until Thanksgiving to really get serious about saving for the holidays why not start now? Sure, it may seem like you have all the time in the world but we all know how quickly time flies. Right now you have a little over five months to get ready so what can you possibly do right now? Begin saving.

Think of it like saving for retirement. Is it easier to save a little bit of money each paycheck over a long period of time or wait until you’re ready to retire and try to come up with all of the money in a short amount of time? Obviously it is easier to save a little bit over a longer period of time. Well, this is no different. With just under half the year remaining until the holiday season you can start now by saving a little bit every week or month instead of waiting until late November and realize you either have to dip into other funds or use the dreaded credit cards.

A Little Bit Goes a Long Way

To illustrate this point we will go over a typical scenario. Let’s assume that you and your spouse are both paid bi-weekly and that leaves you with 12 more paychecks between now and the holidays. How much could you both spare from your paycheck without affecting your other savings goals and meeting your expenses? $5? $10? $20? Here is what the savings could look like:

If You Both Save $5 Per Paycheck:

$5 x 12 = $60
$60 x 2 = $120 saved for the holidays

If You Both Save $10:

$10 x 12 = $120
$120 x 2 = $240 saved for the holidays

If You Both Save $20:

$20 x 12 = $240
$240 x 2 = $480 saved for the holidays

In this example I didn’t take into account any potential interest the money could earn in a high-yield savings account and just wanted to illustrate the point that a couple saving just a few bucks every two weeks can significantly reduce the strain on bank accounts or credit cards come December.

The Key to Making This Work

Without question, most people can live with a few dollars less in each paycheck. We’re talking the price of a combo meal at McDonalds every two weeks to a meal and drink at a casual dining restaurant. Living without that little extra money isn’t the hard part. The difficult part comes after the money has already been saved.

First, this money needs to go into a safe place. Could it go into your regular savings account? Sure, but it is easier to lose track of what you’ve put in or you may end up using the money for something else. The worst place you could keep it is in your checking account or another account easily accessible by either online transfer or ATM card. The easier it is to access the money, the less likely it will be there come December. Create a new account if you have to and treat it like a mini-retirement account.

This is the perfect time of year to begin thinking about the holidays even if it is the last thing on your mind. It only takes a few minutes and a few dollars to begin the process now. Once it is in place you will have a nice little stash of money set aside to help with buying gifts or travel later in the year. You will have enough stress dealing with your in-laws, don’t let worrying about money make it even worse.

Final Thoughts

This is just the tip of the iceberg, but it covers most of the key areas you should be looking at this summer. Remember your goals and check to see how you’re progressing. Without goals and tracking you have no way to gauge your success. Taxes are a necessary evil but if you take some time to think about them right now you’re going to be in a better spot come April. It’s easier to make small changes now rather than be hit with a surprise later. And don’t forget your investments. We’ve gone through some crazy times over the past year so it’s important to keep up with your portfolio. And the Christmas in July bit was part for fun, but it illustrates the importance of how small things can add up. Maybe you won’t be saving up for the holidays, but if you can put away just a few dollars extra a week for anything you’re going to be thanking yourself later.

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Filed Under: Personal Finance

About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.

6 comments
Neal Frankle
Neal Frankle

I'm always amazed at how comprehensive your posts are.

WOW....

This is a check list that all of us should use. Thanks

Ken
Ken

Christmas does happen the same time every year. It's a simple fact but yet so few prepare for this event ahead of time.

Andy
Andy

Jeremy,

This is a great post! I really liked the rebalancing theory discussion, as it is something I'm starting to work with in my own portfolio. You say you use threshold, and I like the theory, but do you have any rules of thumb for percentages. For example, I am in my mid twenties and currently about 85/15 stocks/bonds, which means a change of 10% up or down is a fairly large swing. My question is, would your threshold change dependent on your allocation percentages? Or is it arbitrary?

2008 Taxes
2008 Taxes

Very good advice. I have in the past copied my Turbo Tax return file and then modified a copy to represent the changes that have occurred personally in the current year. The result will not be perfect due to changes from one year to the next, but it gives me an ideal.

Savings Accounts Girl
Savings Accounts Girl

Great article, right now is a great time to reevaluate goals and priorities - especially when it comes to finances. I'm trying to save as much as a $1000 every month - this isn't a set amount and varies but hopefully come December I'll have a good chunk of cash saved up for a nice trip somewhere - so far the plan is going well.
Opening an online savings account really helps. :)

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