Last Modified on October 13, 2020

Financial planning is not limited to knowing what to do with your money. It is impacted by various aspects from time-to-time and needs to be revisited and modified to ensure it is in line with your financial goals. A mid-year financial checkup helps to build your holistic financial well-being. Such a strategy becomes even more critical in a tumultuous year like 2020, putting financial situations in flux.

Here are 10 Reasons Why you Must Conduct a Mid-Year Financial Checkup:

1. Review monthly spending

Even if you created a monthly budget at the beginning of the year, it is possible that you might be spending over the limit now. Expenses on dining, take-outs, entertainment, monthly subscriptions, travel, etc. often tend to go overboard. Moreover, you could have withdrawn funds for an emergency or a major unexpected expense, like a house repair. Hence, a financial checkup in the middle of the year can help to determine where your income is being spent and in what share. It helps to go through your bills, monthly deductions, bank statements, etc. to identify areas exceeding the budget. You can then find ways to curb your spending and stay within the planned budget. For example, if you are paying $9 a month for a music subscription and $15 a month for a streaming video service, you are paying $288 for both the services annually. If this goes beyond your budget, you could choose a cable TV connection or satellite services and reduce your overall costs.

2. Evaluate savings contributions

While planning finances, you may have set your monthly and annual savings rate at the beginning of the year. Ideally, savings should comprise 10-15% of your income. However, it is possible to miss the target sometimes. A mid-year checkup helps you re-think your expenses, make new adjustments, and ensure that you make up for the lost savings. Alternatively, a six-monthly assessment helps to evaluate your contributions to accounts, like the 401(k) account, a 403(b) plan, or an IRA (Individual Retirement Account), etc. The Internal Revenue Service (IRS) often modifies the contribution limits to these accounts. Thus, a semi-annual assessment can help keep up with the new limits, allowing you to maximize your tax advantages. In 2020, the IRS announced that employees could contribute up to $19,500 in 401(k) plans. Taking this into consideration, an employee who was 49 years old in 2019 would be able to increase his share by $7000 in 2020. This will include $500 in standard contribution and $6,500 in catch-up contributions at the age of 50.

3. Check credit record and fees

The importance of maintaining a healthy credit score (above 750 points) is paramount to enjoying a good financial standing and reputation. Thus, it is advisable to take a half-yearly assessment of your credit reports to identify any monetary discrepancies and deficiencies. Some bureaus, like Experian, Equifax, and TransUnion, provide free credit reports every 12 months. You can check these reports for any errors or suspicious activity, or simply analyze your own activity. If you fall short on the score, you can improve by paying bills on time, keeping the deficient balance low, repaying debts, and being more cautious of your debt liability in general.

Similarly, you may have examined your bank fees and credit card charges at the beginning of the year. But often, banks and credit institutions, levy new charges, which could drain your savings silently. Thus, a mid-year financial checkup can bring attention to such charges and help you cut unnecessary fees.

4. Gauge debt repayment plans

It is beneficial to list all your debt and interest rate obligations in the middle of the year for an in-depth review. This includes your student loan repayments, mortgages, car loans, and other debts. In case you have missed a payment or are likely to miss one in the future, it is advisable to inform your lender beforehand. This could help you save on penalties and avoid a negative credit score. Alternatively, if your mid-year review leaves you with some extra money at hand, you can use this to repay your debt obligations.

5. Rebalance investments

While many would advocate not interfering with investments and letting them be, it is good to know the value of your investment portfolio from time-to-time. Volatility in the stock market can have severe implications for your retirement savings accounts. Even though acting in the moment is not prudent advice, it is beneficial to assess if a strategic move can help minimize losses. For instance, you could set a stop-loss order for the sale of shares. A mid-year review can enable you to balance your portfolio as per your risk tolerance at a given life stage. For example, if you are nearing retirement in another 6 months, it is best to check if your asset allocation mainly comprises secure bonds and fewer equities. Alternatively, if you have more than 10 years left to retire, rebalancing assets to make more investments in stocks can be a good idea.

6. Evaluate taxes

From the time you frame your tax plans at the beginning of the year, there could have been several changes that might have impacted your final tax liability. Modifications in tax laws, changes in income, alterations in retirement contributions, etc. can alter your tax obligations. A semi-annual assessment of your taxes can help you reduce your tax burden and mitigate tax consequences. Moreover, major life changes, like marriage, having a child, getting divorced, etc. can also alter the amount of tax you pay. Hence, it is best to get a mid-year tax estimate and make adjustments accordingly.

7. Assess emergency fund

A half-yearly note of your emergency fund status can help determine if there is sufficient money (at least 3 months of living expenses) in reserve for uncalled events. This is even more essential in conditions, such as during the COVID-19 pandemic, which slowed the economy, shut-down businesses, and increased unemployment, leaving several with a loss of income.

8. Adapt to major life changes

Changes, including moving houses, adopting new living arrangements, the birth of a child, marriage, divorce, or fluctuations in income, etc. can have significant financial impacts. A semi-annual review can help you adapt your financial plan to reflect these changes. You could increase your life cover for insurance, make more investments, create a new budget, increase your contingency funds, and a lot more.

9. Review beneficiaries

A mid-year financial check involves an assessment of all beneficiary designations. This can help you pass on your estate to suitable heirs and in the right share. Specific assets, such as an IRA, a 401(k) account, a college savings plan, annuities, mutual funds, etc. can be passed on to your nominees, in case of an untimely demise, incapacitation, or disability. Reviewing them regularly helps you match them as per your current wishes. This also ensures that your beneficiaries are updated in accordance with life events, like marriage, divorce, death of a spouse, birth or adoption of a child, etc.

10. Update goals

Middle of the year is a perfect time to review your financial goals, assess if they are still achievable (given your financial situation), and take appropriate actions to stay in line with the final objective. For example, if you planned to take early retirement at 55 years, but your current financial conditions lack adequate funds for retirement, you may have to continue working for a few more years. That said, a semi-annual check is also a great time to set some new plans, if you have not already done so.

To sum it up

Mid-year financial checkups are a strategy of a prudent planner. Even if the assessment reveals diversions from goals, overspending, piling debts, etc., there is plenty of time to bring everything back on track. It helps to conduct mid-year reviews. You can also seek help from professional financial advisors for guidance on how to begin.