June 14, 2023
Are you on track to meet your financial goals? Follow these five steps to find out.

Summer is kicking into high gear and your finances may be the last thing on your mind right now. But here's why it's important to carve out time for a simple five step mid-year money check-up.

Just like the halftime break in football, the purpose is to take a breather, assess progress toward your goals and adjust your strategy if you aren't on track. This is an exercise I do regularly with my clients—and often they are surprised at what they learn. I'll share a few of their "aha" moments below. Let's dig in.

Step 1: Update your spending plan

'This is why I don't have money to save for retirementUber has it all!'

Recently, I was helping a client put together a spending plan. She was shocked to discover she was spending an exorbitant amount of money on Uber Eats—thousands of dollars. She wasn't aware of how much she was spending because she never stopped to calculate it.

So often we just tap and pay. It's easy to spend without realizing how much it adds up. That's why I always recommend you track your monthly expenses: review your credit card statements, download a free spending tracker or use a budget app or software. It's important to know where your money is going. If you identify a spending issue—use the information to intentionally change your behavior—so you can funnel the money where you want it to go.

Step 2: Contribute to your company's retirement plan up to the maximum match

'It's free money from my employer to help me achieve my goals.'

Don't leave this free money just lying on the table. Here's what the impact of an employer match can mean over 35 years:

• Let's say you are 30 years old, earn \$80,000 per year and contribute 5% each year until age 65. The value of your 401(k) could be \$460,092 at age 65.*
• If you add in a dollar for dollar 5% employer match, the value of your 401(k) at age 65 with the employer match could be \$920,184.

Your action item: If you couldn't contribute up to the match amount at the start of the year—consider this—did you get a pay raise recently? If yes, carve off as much of that pay increase as possible to bump up your savings to your match level now, and increase the amount you are contributing to your company 401(k) plan.

Step 3: Pay down non-deductible high interest rate debt

'The sooner I pay off my high-interest rate credit card debt, the faster I will essentially get a pay bump.'

One of my clients recently purchased her first home. She had debt on five different credit cards—but wanted to first focus on building an emergency fund—before paying off the debt.

She experienced her "aha" moment when we ran the numbers in a debt calculator. She saw she would pay significantly less in interest if she put half her savings into an emergency fund account and the other half to paying off debt. So, we created a plan to tackle the debt at the same time she replenished her cash reserve account. She could pay off the debt faster and pay less in interest payments, while still building her emergency fund. And, once that debt is paid off, she essentially gets a pay raise—because she no longer has debt repayment!

Remember, credit card interest is not deductible, unlike mortgage interest (up to limits). It's important to stop the clock on high interest debt as fast as you can because it just keeps spiraling higher every month.

Step 4: Create an emergency fund (or increase it)

'My emergency fund helped tide me over when I was laid off from my job.'

To keep from dipping into long-term investments or borrowing at high interest rates when you need cash in a hurry, create an emergency fund that can cover at least three to six months of essential living expenses like rent or mortgage, utilities, food, and transportation.

If you don't have three to six months of savings built up, consider funneling extra money toward this goal now.

During the pandemic when millions of people lost their jobs, those who had an emergency fund in place experienced that time with less worry and had a cushion. Without an emergency fund, you may face choices like living off high-interest credit cards, pulling money from retirement accounts (and paying early-withdrawal penalties of 10% or more) or postponing monthly payments and incurring late fees which could damage your credit score.

In today's interest rate environment, keeping your money in a higher-yielding savings account is a welcome change. However, consider prioritizing liquidity and quick access to funds in a pinch over higher interest, as tempting as that could be. Emergency funds should be held in liquid investments, like an interest-bearing bank savings account to provide you fast access to your cash, versus keeping the funds in, for example, a one-year Certificate of Deposit or another investment that could be harder to access immediately.

Step 5: Keep investing to build your wealth

At this halfway mark in the year—if you discovered "extra money" after you completed your spending plan and have already conquered the first four steps—it's time to up your investing game. Rely on your personal goals to help you decide what to save and invest for next.

What are your financial goals? Do you want to save for a down payment for a house? Do you want to save for your child's education? Or are you ready to max out your contribution to your 401(k) and/or IRA? Keep in mind that:

• In 2023, the 401(k) contribution limit stands at \$22,500 and if you are 50 or older, you can save an additional \$7,500 in catch-up contributions for a total of \$30,000.
• The IRA contribution limit totals \$6,500 in 2023, with a catch-up contribution for those 50 or over of an additional \$1,000.

If you are close to retirement, consider adding an extra payment to your mortgage to help pay down that debt faster.

This mid-year money check-up is a simple way to take stock of your finances and find out where you are today. Use it as a roadmap to measure against your financial goals. If you are on track, congratulations! Keep up the good work. Or, if you've veered off course, use this time to adjust your spending and savings plan. It may only take a few adjustments to help get you back on track.

No matter where you are, there's still time to make progress toward your financial goals in the second half of the year. You've got this! Get started today.

*Assumptions in this example are for illustrative purposes only: 6% annual growth on investments with monthly compounding and based on 5% contributions split equally over 12 months with no increase in contributions over the 35-year period, not adjusted for inflation.

Money can be complicated. That's why we're here to help. Email us your money questions at moneytalk@schwab.com for consideration in a future article. We regret we cannot reply to questions individually or provide personalized financial planning guidance via email. If you have a question about your Schwab account or for general inquiries, contact Schwab. Thanks!

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