New year, new you: Nine steps toward financial success in 2023

A yearly accounting of personal finances should be a routine for everyone, but it isn’t for most. If that describes you, start at the top of the following nine-step list and work your way through each item. If you’re already well organized and have your financial house in order, feel free to skip down the list until something catches your eye.

1. Create a balance sheet

This first step is simple: Just make a list of all your assets and liabilities. This process builds the blueprint for your financial house and it can show where there might be structural weaknesses. More importantly, if you don’t have a balance sheet and something happens to you, the search for your assets will become a buried treasure hunt. What you use doesn’t matter — a spreadsheet or an app is fine. List each asset or liability as it’s titled, with account numbers, the interest rate charged, and current beneficiary designations. Provide as much or as little detail as you want. Doing this based on year-end values every year gives you the 10,000-foot view of your financial situation and provides a great sense of how you're growing — or not — financially.

2. Manage your debt; don’t just accept it

There’s good debt, and then there’s bad debt. Good debt may be a fixed-rate mortgage, both for the tax write-off and the security of knowing that you’re building equity. Bad debt could be student loans or credit cards with an interest rate significantly higher than your investment portfolio could make on an annual basis. In the new year, try to pay off the highest interest debt first and look for opportunities to consolidate.

In the new year, try to pay off the highest interest debt first, and look for opportunities to consolidate.

There’s both a practical and emotional side to paying down debt. For instance, if you receive a large bonus, have no credit card debt, and have a low fixed-rate mortgage, it may make financial sense to invest the funds in your investment portfolio, especially if you’re younger and that low-rate leverage actually helps your financial plan over the long term. However, some people may decide to pay down their mortgage for the prospect of being debt-free sooner, which can sometimes feel more rewarding than the extra return that may come from investing.

Lastly, review your credit report. You can get a free copy from the three national credit bureaus annually — an especially wise move in this age of identity theft.

3. Construct a budget

Find a tool that works for you, whether that’s an Excel spreadsheet or an app on your phone, to create a budget and track your income and expenses. You may already know that your health club membership costs $200 a month that you use twice a month, or that you barely watch TV and yet pay a ridiculous amount for cable and 15 streaming services, but seeing it written down will enable you to assess what’s most important to you and do the kind of trimming most overgrown household budgets could use.

4. Revisit your beneficiary designations

Death is one thing most people work hard to avoid thinking about, but let’s face it: It’s something that will happen to all of us one day, and it’s important to be prepared. Ensure that you’ve elected both primary and contingent beneficiaries for all beneficiary-designated assets, including 401(k) plans, pensions, annuities, and insurance policies, and that they’re up to date. Also, consider reviewing any payable on death (POD) or transfer on death (TOD) accounts for individually named bank or brokerage accounts. Failure to address these items could mistakenly put assets into the “wrong” hands (i.e., a person you named as a beneficiary when you were young and single, or an ex-spouse instead of your current spouse or adult children). Worse yet, without designations, your assets will head to probate court for sorting, which can be expensive and time-consuming at a moment when heirs generally want their deceased loved one’s financial affairs wrapped up quickly.

5. Plan all aspects of your estate, not just the financial components

Accounting for the finances and potential tax issues attributable to your estate are extremely important. Beneficiary designations, trusts, and wills are primary documents to consider for a smooth financial transfer after your passing. However, there are additional components to an estate plan that are just as important. If you have children, who will be your children’s guardian if you and your partner pass prematurely? Who will oversee the funds, and how will they be distributed? Do you have a healthcare power of attorney or durable power of attorney? Have you recently moved to a new state where laws might be different?

If you opt not to inform your family about your estate plan while living, make sure they know where to find all of your estate documents in the event of your passing so that they can easily settle your estate and move forward without additional stress or loss of assets.

6. Review your insurance coverage annually

Don’t just set it and forget it; reevaluate your needs — because they can and do change from year to year. This applies to all your insurance needs: homeowners, auto, life, disability, umbrella, etc. Are you paying a high cost for a permanent insurance policy with a lower death benefit that won’t come close to covering your family’s needs if you passed prematurely, when your biggest life insurance need could be covered with a low-cost term policy? 

What if your normally sweet dog, Duke, bit the mailman, or the neighbor down the street slips on the icy driveway walking up to your house? Do you have an umbrella policy that provides liability protection above the limits offered under your homeowners and/or auto policy in the event that you’re sued? A periodic review of your insurance policies is a prudent exercise that can pay off in a big way when or if the unforeseen happens.

A periodic review of your insurance policies is a prudent exercise that can pay off in a big way when or if the unforeseen happens.

7. Build an emergency reserve and manage your cash.

Bad stuff happens. Do you have three to six months of cash reserves to afford your lifestyle and that can be drawn upon within 24 hours? You don’t want to rely on divesting illiquid assets, liquidating investment or retirement accounts, or being forced to take out additional loans. If you are starting from scratch to build your emergency reserve, you should bump this item up on your to-do list.

As you build your emergency reserve and solidify your financial house, there’s more good news. You now have the ability to actually earn some decent interest with some of the highest yields on cash in over a decade! So, don’t just leave your entire reserve in your checking account — be sure to look around for better rates on high-interest savings accounts and money market funds that could earn you significantly more interest this year on your reserve dollars. 

8. Save and invest for your future

Commit to maximizing your savings by using employer-sponsored retirement plans such as 401(k) or 403(b) plans or setting up a monthly deposit into your IRA or brokerage account and revisiting your elections or contribution amounts every year to make sure they align with your goals. Do you have college-bound kids? Use a 529 plan or traditional savings and investment accounts, shifting and rebalancing between them depending on how your life, retirement plan, and the ambitions of your children change as you all grow older. And most importantly, make these deductions automatic — if the money never touches your bank account, psychologically it won’t feel as if you’ve lost anything, and you’ll be more likely to achieve your goals.

Commit to maximizing your savings by using employer-sponsored retirement plans such as 401(k) or 403(b) plans or setting up a monthly deposit into your IRA or brokerage account.

9. Set goals

Many people use journals to set health, spiritual, or family goals for the year, because setting pen to paper can help you document and achieve your goals. This works the same way with financial goals — so write down your short-, mid- and long-term financial goals. You can be as obsessive and detailed as you want, provided it’s useful. Writing it down doesn’t mean the job is done, but it makes it a whole lot more likely to achieve those goals!

Finally, if you’ve reached the end of this list and still have questions, call a knowledgeable friend or family member, or hire a trusted financial advisor.

The new year is a perfect time to reassess what’s going well and what needs to improve in your financial life.