Ten Mini-Projects to Get Your Finances in Order (Part 2)

In my last blog, I shared five of 10 small projects that will help you get your finances moving in the right direction. (If you missed Part 1, read it here.) Hopefully, you’ve picked a few projects to work on and are making progress.

Here are five more to prioritize as your schedule allows:

6. Adjust Income Tax Withholding Settings

The first part of the year is the best time to estimate your taxable income for the current year and adjust tax withholdings and estimated tax payments to make sure you’re paying the right amount: You don’t want to owe too much or get too big a refund with your tax returns the next year.

You might like receiving a big refund after filing your tax returns, but remember that when you do, it means the government had the use of your money during the year without paying you interest. To avoid making unnecessary payments and keep more of your money available for your own use, set your withholdings and any estimated payments so that you’ll get a small refund, maybe a few hundred dollars, with your returns.

7. Review Your Estate Plan

Your estate plan establishes who receives your assets and who will act as guardian for any minor children when you pass away. An estate plan often consists of a revocable trust and will, health care power of attorney, and financial power of attorney for an individual or for each spouse. Estate planning is governed by state law, and estate-planning best practices vary from state to state.

If you don’t yet have an estate plan and you have significant assets outside of retirement accounts, like a home, other real estate, individual or joint brokerage accounts, or additional investments, it’s a good idea to review your situation with an attorney who specializes in estate planning and get one in place. For parents of minor children, creating a will is particularly important.

If you have an estate plan but haven’t updated it in a while, now is a good time. It’s important to note that changes to the estate law for 2018 are only temporary, expiring in 2025, and the major changes to estate law from 2010 and 2012 remain in place. If your estate plan was created before 2012 and hasn’t been updated since, it’s even more important to review it with your estate planning attorney.

Look over your successor trustees, executors, and holders of power of attorney for health care and financial matters, and make sure the people you nominated are still good choices to serve. Review your beneficiaries as well to ensure your assets are going to the people and organizations you want. Finally, verify that beneficiary designations are properly completed for any retirement accounts such as IRAs, Roth IRAs, and 401(k)s.

8. Evaluate Mortgage and HELOC Interest

Beginning in 2018, interest on a home equity line of credit (HELOC) is no longer tax deductible. That means the effective after-tax interest rate on your HELOC just increased. Since the interest on that debt is no longer shielding part of your income from tax, it may be time to pay off your HELOC completely or start paying it down more quickly.

Mortgage interest is still deductible for 2018. As of this year, mortgage interest on loans up to $750,000 is deductible, and for loans in place before December 15, 2017, mortgage interest remains deductible on loans up to $1 million.

Mortgage interest is typically one of the largest ongoing expenses for households, and refinancing can reduce this expense. Although rates may have finally started their long-awaited climb back to higher levels, interest rates remain near historic lows; this may be the last time to refinance a home mortgage at low rates until the next big economic recession. However, refinancing typically also extends the loan term back out to its original length—for example, 30 years—which can potentially increase the total interest expense on the life of the loan more than if you kept the existing loan with a higher interest rate.

9. Increase 401(k) Contributions

Contribute as much as your cash flow allows to your 401(k) plan at work, maxing out if possible. The maximum contribution amount for 2018 is $18,500. If you are 50 years old or older, you can contribute an additional $6,000 for a total of $24,500.

When determining how much you can set aside, remember that your taxable wage income is reduced by the amount you contribute. For example, if you are 35 years old, earn $130,000 per year, and make the maximum 401(k) contribution, your taxable income is reduced to $111,500.

At a combined federal and California state income tax rate of 31%, your contribution saves you $5,735 in tax, and with these tax savings, you’re only out of pocket $12,765, not $18,500. On an after-tax basis, maxing out your 401(k) won’t hit your cash flow as hard as you may be thinking, and your steady saving will build wealth for the future.

10. Enroll in an Employee Stock Purchase Plan, if Available

Employee stock purchase plans (also known as ESPPs) are offered by many publicly traded companies whose stock trades on public stock exchanges. If you have this option, it can be another great place to save.

With an ESPP, you make contributions from your paycheck to an account maintained by your employer, and your employer uses the funds to buy company stock on a regular schedule, often at six-month intervals. Depending on the terms of your employer’s ESPP, you may be able to buy stock at a discount of up to 15% or more from the market price. With a 15% discount, if you sell your shares immediately, you can earn over 17% on your savings with little or no risk.

There are limits on how much you can contribute to an ESPP. Tax rules limit your contribution to $25,000, and employers often limit your contribution to 10% of your pay. ESPPs are another program you should seriously consider participating in as much as possible: Those with generous discounts of 15% can be money-generating machines.

Bite-Sized Ways to Take Control of Your Money

These 10 projects are manageable, bite-sized ways to make a big difference in your finances. Remember that you don’t need to do everything at once or in any particular order. Just work on what you can now, and return to the list when you have the time. No matter what your pace, working through these mini-projects will help you take control of your current financial situation and your financial future.