PETE THE PLANNER: Turn the page on 2020, but remain vigilant in the new year

Keywords Investing Column

Peter DunnThere’s no doubt this holiday season will be remembered for all the altered traditions.

I’ll open unironically taut turtlenecks via Zoom, settle for my version of my mother-in-law’s cheeseball, and peer at Santa through plexiglass like he’s a bank teller hoping he doesn’t have to grab dye packs from his knapsack. And while we hope these Kubrick-esque traditions have only one showing, there is one holiday tradition that cannot, will not be compromised: the year-end family finance extravaganza. OK, fine. It’s a money meeting.

I know what you’re thinking: “Pete must be really fun to be married to.” Sure, if you like eating dinner at 4:30 and enjoy listening to passionate diatribes about the ridiculousness of being fashionably late, I’m tolerable. However, our year-end household financial meeting has become something we look forward to as late December ticks on. And because I’m deep into the holiday spirit, I’d now like to offer my meeting agenda to you as a holiday gift.

This meeting has four aims. We conduct a year-over-year comparison, ensure all tax efficiencies have been used, evaluate our power percentage, and try to identify potential speed bumps in the year head.

The year-over-year comparison is usually the fun part, as far as math fun goes. In good-market years, like this one, your contributions plus asset growth equal an impressive net-worth increase. If you’re still in the middle of your career, your net-worth increase should, at the very least, exceed the performance of the S&P 500 in the given year. This year, your net worth should have increased at least 15% or so, especially if you’re making hearty contributions.

Next, top off your tax-efficient accounts to ensure you’re properly taking advantage of the deductions and tax benefits available to you from the IRS. This includes, but is not limited to, employer-sponsored retirement accounts (e.g., 401(k) or 403(b)), individual retirement accounts (IRA), health savings accounts (HSA) and college savings plans (e.g., 529).*

For what it’s worth, when I see people max out their annual HSA contribution, I know they’re in tune with their financial life. It is the most tax-advantaged financial vehicle out there. You can deduct the contribution this year, avoid taxes on its growth and have no tax obligation when you withdraw the money for qualified reasons.

Truth be told, you’ve likely never heard of power percentage. It’s a metric I created about five years ago to measure how much of your gross income is used to increase your net worth via savings, investing and debt reduction. To calculate it, add up both your and your employer’s contributions to your retirement plan, any other savings or investments you made (including HSA contributions), then add in the amount of debt you paid down this year (including mortgage principal). Divide that total by your gross income (before any tax or benefit deductions). Ideally as a working person, your power percentage is 35% or higher. If it’s below 10%, you’ve got a serious problem.

Finally, grab your calendar. At the very least, you should identify financial threats and opportunities over the next three months. Whereas an uncertain economy might threaten your first quarter, a tax refund or economic stimulus check might provide you an ounce or two of opportunity.

The best part of the meeting, other than the incredible spreadsheet you get to create, is the conversation. No, this isn’t one of my pithy jokes. If you happen to be in a relationship that involves the sharing of finances, you owe it to your relationship to be on the same page.

All I have for you today is anecdotal evidence, but of the thousands of couples I’ve chatted with over the last two decades, the ones who work together on their finances are the happiest. And, yes, I’m guessing there’s a chicken-or-egg debate involved here.

I’d like to leave you with one additional note as we wrap up one of the worst years in America’s history. Avoid the urge to let the striking of the clock at midnight on Dec. 31 absolve you from the responsibility of staying vigilant heading into 2021. Whether you need to hear this or not, 2020’s being over doesn’t actually solve anything. Keep planning. Stop guessing. See you next year.•

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Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.

*Disclosure: Dunn is a paid endorser of Indiana’s 529 college savings plan.

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