From Reflection to Action: A Year-End Financial Tune-Up

Planning is everything

With 2025 fast approaching, it’s an opportune time to revisit and reassess your financial goals and your strategy to reach them.

Take a moment to reflect on where you spent money this year, and how much. Consider jotting down the details for a clearer perspective.

Did you stay on budget or find yourself spending more than planned? Whether it was home improvements, a memorable vacation, or contributing to college savings accounts, did you achieve your family’s financial goals?

Also, consider what changed in your life this year. Births, marriage, divorce, and retirement can all have an impact on both your spending and your overall strategic financial plan.

Don’t have a plan? This is a great time to create one. Be honest with yourself. Whether money is tight or you find yourself with a surplus, build a financial plan to better align spending with your near-term priorities and longer-term goals.

As we discussed here, true financial freedom is having enough. Without goals and a plan, quantifying ‘enough’ is exponentially harder if not impossible.

PCR: Plan, Course-correct, Repeat.

Check in on your investments

•       Cash and your emergency fund

If you tapped into your emergency fund during the year, it is a good time to refill it, or if you don’t have an emergency fund, start one. Having these funds at the ready can help you cover surprise expenses, such as car repairs or medical expenses, without relying on high-interest credit cards or selling long-term investments.

Is your cash working for you? While borrowing rates are stubbornly up, so too are savings rates. With today’s money market funds and CDs paying upwards of 4-5%, your cash can provide not only an emergency cushion but a reasonable return as well.

•        Top off retirement contributions

If your financial situation allows, it may be a good idea to increase your contributions to your retirement account(s). This can be a good annual practice until you’re contributing the maximum amount allowable to an IRA, 401(k), 403(b) or their Roth counterparts.

For example, if you have access to a 401(k) through your employer, you’ll have until the end of the year to contribute up to the $23,000 limit for 2024. People above the age of 50 can make additional catch-up contributions of up to $7,500 for a total of $30,000. 

If you have a health savings account (HSA), consider maxing-out that contribution as well in 2024--$4,150 for an individual and $8,300 for a family. Whether you use the HSA for long-term saving or near-term spending, it is triple tax-advantaged: Funding is tax deductible, growth isn’t taxed, and withdrawals are tax-free if spent on qualified medical expenses.

(Pro-tip: If you are a prodigious accumulator of wealth, most HSA plans have investment alternatives but research has found that only 12% of account holders invest in assets other than cash. Think about your options.)

The tax advantages all these accounts offer can help your money grow exponentially over time.

•          Tax-loss harvesting

As you are plotting year-end moves, inevitably you will hear about investors considering tax-loss harvesting in their taxable brokerage accounts. “Harvesting” refers to the selling of investments at a loss to offset capital gains from other investments. You then use the sale proceeds to buy a different investment so overall you stay invested in the market. The last point is critical—it’s what distinguishes the harvesting strategy from market timing.

(Pro-tip: Harvesting can help minimize taxes, but be mindful of something called a “wash sale.” The IRS is fine with you selling at a loss, but it doesn’t like it when you sell at a loss and then quickly buy back the same investment (or a ‘substantially identical’ investment). In fact, buying back the investment within 61 days (beginning 30 days before the sale and ending 30 days after the sale), can trigger a wash sale and defer the loss. The wash sale rules are tricky, speak with a professional.)

It’s also a good time to pause and reflect on the premise of this strategy.  Harvesting implies you have losses to be harvested. With the markets once again approaching all-time highs, why do you have underwater investments in the first place?

Think about it. If you had been purchasing “the market” (e.g., an S&P 500 ETF or similar broad-based index funds), then you would not have a significant loss on your fund shares since the market is approaching its highest level now! 

This means that losses you do have are likely in your individual stock selections. This is just a friendly reminder that picking individual stock winners is difficult (even for professionals) and a humbling experience.

Charitable giving

•          Bunch your donations

If you plan to donate the same amount of money each year, consider “bunching” the donations into a single year. This could increase your potential itemized deduction for that year.

(Pro tip: For large gifts, consider using a donor-advised fund to spread out the giving while simultaneously taking advantage of “bunching.”)

•          Donate appreciated assets 

If you have large, unrealized capital gains, rather than selling and donating the cash, consider donating the appreciated assets. If you itemize, you can deduct the full fair market value of the appreciated assets, and you won’t need to report the gain as taxable income. 

Block out the noise

This month the ‘news’ stories will start to appear touting the “best-performing investments of 2024.” Making portfolio decisions based on headlines is like buying a house based on the color of the front door.

Don’t chase the hot hand, the hot stock, the hot story. Stay calm and remain cool. Have faith in your planning process.

Don’t be too quick to jump into the high flyers or dump the underperforming ones. Twelve months seems like a long time but with investing, that’s a short look. Often, today’s shooting stars become tomorrow’s laggards and vice versa. There are good reasons for changing between investments but chasing performance isn’t one of them.

Above all, remember that investing is a tool, not a plan.

Review (or create) your financial plan, make any necessary adjustments, and then get back to living your best life now.

As always, invest often and wisely. Thank you for reading.

The content is for informational purposes only. It is not intended to be nor should it be construed as legal, tax, investment, financial, or other advice. It is merely my own random thoughts.

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