Getting things in order before ringing in the new year can be stressful. There are holiday preparations, work deadlines and family gatherings to attend. But for many, tackling the financial to-do list is the most taxing.
After more than 30 years of working in finance (as an auditor, investor, tax preparer and consultant), I’ve witnessed the impacts of deferring a financial checkup. I’ve seen people leave hundreds — often thousands — of dollars on the table because they missed out on tax savings, credit card bonuses and several other opportunities.
Of course, many financial consequences stem from failure to take action. Here are the eight biggest money mistakes I see people making at the end of every year:
1. Not cleaning up monthly statements
You’ve probably heard this advice several times. But I’ve worked with a handful of clients who needed my help primarily because they slacked off on their annual financial cleanups.
What to do: Gather your last three monthly statements and look for services, subscriptions and memberships that you rarely use.
Ask yourself: What unnecessary expenses can I cut before the year is over? Once you’ve identified the services that add little or no value to your life, cancel them immediately.
In most cases, I recommend calling to cancel rather than doing it online. Some vendors may give you a prorated credit, meaning you’ll only be charged a partial amount of the full subscription price. Or, if you’re extremely persuasive, you might even get them to waive this month’s fee altogether.
2. Not taking advantage of rewards credit cards
If you’ve been wanting to sign up for a new credit card, the holiday season is a great time to do it. Many companies offer generous perks, such as welcome bonuses and big cash back rewards — just in time for the shopping craze.
What to do: There’s no “perfect” credit card for the holidays. It all depends on your purchasing priorities, so look closely at the bonuses categories for the places you plan to do most of your shopping.
If you plan on getting most of your gifts and holiday needs on Amazon, for example, focus on credit card offers with extra benefits that are unique to Amazon.
3. Not using up your FSA account
A flexible spending account (FSA) allows you to use pretax dollars (up to $2,700 in 2019) to pay for out-of-pocket medical expenses. The downside, however, is that money in an FSA doesn’t carry over from year to year.
What to do: Unless your plan includes a rollover or deferral provision, check your remaining FSA balance and be sure to use up all funds by Dec. 31.
Consider stocking up on items that you plan to use the during the following year (e.g., sunscreen, bandages or contact lens solution). Schedule that appointment with your optometrist for new reading glasses. Go to your dentist for the teeth cleaning you’ve been putting off.
4. Not contributing enough to your 401(k)
If you have a 401(k) plan through your employer, it’s important to make sure it’s on track with your retirement goals every year. Otherwise, you could lose out on a lot of money and end up working longer than you had intended.
What to do: Some companies will match employee 401(k) contributions by up to a certain percentage (usually 3% to 6%) of their salary. If your employer offers you this “free money” perk, then, at the very least, aim to put enough of your paycheck into your 401(k) each month to get the maximum company match.
For the 2019 tax year (returns filed in 2020), the maximum contribution to a 401(k) account for those under the age of 50 is $19,000. If you’re over 50, you can add an extra $6,000 catch-up contribution, for a total of $25,000.
Also, if you receive an end-of-year bonus, allocating a portion of it your 401(k) is a relatively pain-free way to optimize contributions. Remember, when you make voluntary contributions to your plan, you reduce your taxable income. So the more money you put in, the more you’ll lower your tax bill.
5. Not planning for major 2020 events
Accumulating the necessary funds for big-ticket items (e.g., a wedding, car or house) requires a fair amount of time, so it’d be wise to make financial preparations for any costly plans you have for 2020.
What to do: Write down any big purchases or significant life events you have planned in the foreseeable future.
For each one, determine the projected date and total amount needed to finance it. Then divide the estimated total by the number of months until the big day (this will tell you how much you need to save each month in order to reach your goal).
Keep in mind that things don’t always turn out the way we expect them to, so don’t rule out the option of postponing the event or purchase altogether if you need a longer savings runway.
6. Not kicking losers to the curb
Capital gains (the profit you get after selling a capital asset, such as stocks, bonds or real estate) and losses (when you sell a capital asset for less than what you paid for it) impact your taxes, so make it a point to get rid of any low-performing investments.
What to do: Access your portfolio and identify any investments that are in a losing position. Ask yourself: Are there any stocks or mutual funds currently worth significantly less than the amount that I paid for them? Which ones have a poor long-term performance outlook?
If you plan on selling any, make sure you do it before Dec. 31 in order to lock in a capital loss on your tax return. (Capital losses on stocks, funds and other investments can be used to reduce income from capital gains.)
7. Not putting idle cash to work
You work hard, and so should your money. It still shocks me to see so many people carrying a large cash balance in their checking account and only earning a fraction of 1% on savings.
What to do: If you haven’t done it already, consider shuttling your cash over to a high-yield savings account.
It only takes a few steps and you could earn up to 20 times more compared with a typical traditional savings account. The best online savings accounts can easily earn you an annual percentage yield (APY) of 1.70% or higher.
8. Not getting tax documents in order
Doing your taxes is a painful struggle. But waiting until February, March or April to get your documents in order will make the process even more stressful.
What to do: If you haven’t already developed a system for organizing your tax records, you might as well start right now. It’s always smart to keep all your filed tax returns and supporting documents for at least three years.
While employers typically give out W-2 and 1099 forms sometime in January, there’s still a lot you can gather right now. (If you’re unsure about what you need, here’s a helpful checklist from the IRS.)