Conducting a Year-End Financial Inventory

The end of the year is a great time to pause and take stock of your financial situation. Conducting a year-end financial inventory helps you assess your progress toward financial goals, identify areas that need attention, and prepare for the year ahead. Whether you're saving for retirement, paying off debt, or planning a major purchase, an annual financial review ensures you're on track.

Let's walk through some of the key areas to review during your year-end financial inventory, from budgeting and debt management to investments and insurance. By taking a proactive approach, you can make informed decisions and set yourself up for a prosperous new year.

Why Conduct a Year-End Financial Inventory?

Before diving in, let's discuss why conducting a year-end financial inventory is essential. In the same way businesses perform year-end audits, individuals can also benefit from thoroughly reviewing their financial lives. Here's why it matters:

• Evaluate Progress - Reviewing your finances helps you assess how well you've met your financial goals. Did you save as much as you planned? Were you able to reduce debt?

• Make Adjustments - If specific financial goals weren't met or unexpected expenses came up, adjust accordingly for the coming year.

• Prepare for Taxes - Year-end financial planning helps you identify potential tax-saving opportunities and ensures you're organized ahead of tax season.

• Set New Goals - After assessing where you stand financially, you can set realistic and achievable goals for the upcoming year.

Now, let's explore some of the specific areas you'll want to review.

Income and Expenses

The first step is to review your income and expenses. This way, you understand where your money goes, how well you've stuck to your budget, and whether there's room for improvement.

Evaluating Your Income

Look at your total income for the year, including salary, side gig earnings, investment income, and any other sources. Compare this to your budget and expected earnings. Did your income increase, stay the same, or fall short of what you anticipated?

If your income increased, consider how you used it. Did you save or invest it? If your income fell short, consider ways to increase earnings in the new year, such as exploring side gigs or negotiating a raise.

Categorizing Your Spending

Next, review your expenses by category - housing, utilities, groceries, entertainment, travel, etc. Look for patterns in your spending. Are there categories where you consistently overspent? Are there areas where you can cut back?

One easy way to get a picture of your spending that doesn't require a specialized budget management program is to download all transactions from your checking and credit card statements to a spreadsheet format. Then you can sort by the payee (like the grocery stores or restaurants you frequent) and total your spending on each. Here's how to do it at the end of the year:

• Log in to your account management website.
• Find the export option and select a date range that starts with January 1 and ends with the current date.
• Choose the CSV option, a spreadsheet format that can be used by any spreadsheet program (most devices come with one).
• Open the file and sort by payee - often called "Description." Some files also offer a category column as well.

Once your list is organized by spending, cut and paste the transactions by payee to a different area and use the auto sum tool to total your spending. If there are similar payees, group them to create a spending category.

Did your spending reflect your budget and other priorities? If not, consider making adjustments moving forward. Need to trim spending? An excellent place to start is often in discretionary categories like dining out or subscription services.

Pro Tip: Many credit cards offer a year-end summary that shows the general categories of your spending.

Assessing Debt and Savings

Debt management and savings play a crucial role in your overall financial health. Year-end is a perfect time to assess both, ensuring you're making progress in paying down debt and growing your savings.

Reviewing Your Debt

Take inventory of all your outstanding debts, including credit cards, student loans, mortgages, and personal loans. Note the balances, interest rates, and minimum payments for each debt. Have you made progress in paying down balances, or has your debt increased?

If you're carrying high-interest debt, consider whether you can prioritize extra payments to reduce interest costs. If you've made progress, congratulate yourself, but set goals to accelerate repayment if possible.

Checking Your Savings Progress

Review your savings accounts - emergency fund, retirement accounts, and savings for short-term goals like a vacation or home improvement project. Did you meet your savings targets for the year? If not, what prevented you from reaching those goals, and how can you adjust for the new year?

Pro Tip: Don't have an emergency fund? Consider starting one now and setting up an automatic checking to savings transfer each pay period. Even a small fund can help avoid unexpected credit card debt.

Reviewing Investment and Retirement Accounts

Investment accounts deserve special attention during your year-end financial inventory. Whether you're saving for retirement, a home, or your children's education, now is the time to review your investments' performance.

Evaluating Portfolio Performance

Look at your investment portfolio - stocks, bonds, mutual funds, ETFs -and assess how each investment performed over the year. Did you experience gains, or did certain assets underperform? Use this review to rebalance your portfolio if necessary, ensuring that your asset allocation aligns with your risk tolerance and long-term goals.

Maximizing Retirement Contributions

Year-end is also the perfect time to check your contributions to retirement accounts, such as your 401(k), IRA, or Roth IRA. Have you contributed the maximum allowed by law? If not, consider making additional contributions before year-end to take advantage of potential tax benefits.

Pro Tip: If you haven't maxed out your retirement contributions, consider increasing payroll deductions for 401(k) or similar plans for the coming year. If you get a year-end bonus, consider depositing those funds in an IRA account. This step may lower your taxable income, and you can contribute for the current year early next year (as long as it's before you file your taxes).

Reviewing Insurance Policies

Insurance is another important aspect of your financial plan that should be reviewed annually. Make sure you have the right coverage to protect yourself and your family from unexpected events.

Check your current policies to ensure they still meet your needs. Have there been any significant life changes, such as a marriage, the birth of a child, or the purchase of a new home? You may want to adjust your coverage. In addition, make sure your health insurance policy is up to date and provides adequate coverage for your medical needs - open enrollment periods often extend toward the end of the calendar year.

Also, make sure your homeowners or renters insurance policy is aligned with the current value of your home or possessions.

Preparing for Taxes

Finally, your year-end financial inventory wouldn't be complete without preparing for the upcoming tax season. Reviewing your financial situation now can help you identify potential tax-saving strategies.

Gathering Tax Documents

Start by gathering your tax documents - W-2s, 1099s, investment statements, and receipts for deductible expenses. Make sure you have everything organized for when tax season arrives.

Identifying Tax-Saving Opportunities

Consider whether you can take advantage of any tax-saving strategies, such as contributing to a retirement account, making charitable donations, or harvesting losses in your investment portfolio. These actions can reduce your taxable income and lower your tax bill.

Work with a tax professional to ensure you're maximizing available deductions and credits. They can help you implement last-minute tax strategies that save you money.

The Takeaway

Conducting a year-end financial inventory is an essential step in staying on top of your financial health. By reviewing your income, expenses, debt, savings, and investments, you can ensure that you progress toward your goals and set yourself up for financial success in the coming year. Take the time to reflect, adjust, and plan ahead - it's the best gift you can give your future self.