213 | End-of-Year Financial Routines that Make You Wealthy

Hilary Hendershott: Well, hello there. Welcome back to the Love Your Money podcast. This is Episode 213: End of Year Financial Routines of the Extremely Wealthy. Today, we’re talking about end-of-year routines and practices that precede wealth. They come before wealth. They enable you to build wealth and that wealthy people adopt and definitely embrace. You can make a lot of money in any given year and your bank accounts may be high, but if you don’t have a set of habits and routines to check in on your money, to monitor it, categorize it, measure it, give it roles and responsibilities in your life, I’m quite sure you will find it can quickly disappear on you. I know many of you have wondered what sets financially successful individuals apart when it comes to wrapping up the year. How do I know that? Oh, because you asked me. So, today we’re answering that question of what strategies can you employ to ensure you finish strong and start the new year, each new year really on solid ground. So, you want to start 2024 with clarity and renewed energy, not being pulled back into 2023 with undone items. Okay. Let’s do this.

So, today we’re going to talk about a diverse range of routines and strategies, taking into account both the perspectives of people who own businesses and people who do not. From tax-efficient strategies to charitable giving, from health insurance to Roth conversions, we will cover it all. You might want to get out your computer or a fresh, clean piece of paper to take notes because we’re going to be stimulating lots of ideas for you today. First, we’re talking about end-of-year checklists and routines for profitable and successful business owners. So, if you don’t have a business, you may choose to fast-forward a few minutes but for right now, I’m going to talk specifically to business owners. Or maybe you’re thinking about having a business and you just want to get ahead of the game. So, go ahead and pull out that 2023 P&L, that’s profit and loss statement, and your balance sheet. Those are your two key bookkeeping reports. Let’s dig right in.

So, first of all, take note of the net income line on your P&L. Are you profitable? How much? More importantly, how does that compare to last year and how does it compare to the goals you set for yourself as the CEO? Trends are important to notice, and the best thing to do is really to come to terms with the actions you or your team took or failed to take that led to those numbers. Good or bad? Maybe you’re celebrating right now, which means you want to ensure that the successful actions you took in 2023 that led to the numbers you love get repeated. Like, let’s do more of the good stuff. Maybe you’re feeling regret right now, which means you need to find new and different ways to ensure your company’s profit-generating activities get baked into the calendar, the routines, and your schedule. For more on profit-generating activities, please do listen to Episode 209 of this show.

So, digging a little bit into the details, are your accounts linked in QuickBooks or your bookkeeping program? So, think about cash transactions, PayPal, Venmo, Cash App, and other ways you spend or accept money that may not be tracked. It’s really important to make sure everything is being tracked, categorized, and retained. I use QuickBooks and if a new account is opened or a savings account is added to save more profits into, I need to make sure my bookkeeper knows about this account to track transactions. So, don’t forget about that new credit card you opened to get those travel points. This meticulous tracking not only ensures accurate financial reporting but also helps you identify all of your business deductions and possibly identify cost savings areas.

A pro-tip, ask your bookkeeper for a list of recurring monthly or quarterly expenses. Maybe you forgot about a software you don’t use anymore or a vendor that you’re still paying for services, but you’re not actually getting them. So, this can be valuable. Get those repeating payments out of your accounts. Once your P&L and balance sheet are complete and accurate for the year, you’re ready for that tax prep meeting with your CPA from a business perspective. On reports, tax returns, quarterly statements, and the like, make a habit of storing these electronically in a place that’s secure and automatically backed up to the cloud. I use Box.com. I can track my financial life back a decade or more very easily, but only because I stored these reports and information when they showed up in my inbox.

We have a saying, “Handle money first.” If you have a backlog, you can get that done in December, and then in 2024, make a habit of doing that as a matter of routine. Just don’t overlook those things. It’s really easy to name a file and shove it in a box. Like I said, I use Box.com. You might use Dropbox. Just put it in a file folder immediately when you see it. But if you go back 3 or 6 months later, you may not even remember what it is, right? You may not even remember that it’s important. So, just handle money first. I also name the files. For example, when I make a tax-deductible contribution to a charity, and in return, they send me a receipt for that tax-deductible contribution, I name that receipt, my last name, the date of the contribution, the amount of the contribution, and the name of the charity. So, I can just go into that folder where I store them and easily calculate the total of my annual contributions without opening any files. That’s nice.

Next action item, collect on all open invoices. I cannot tell you how many times the folks I’m working with really need to be encouraged to go ahead and collect on open invoices. It’s important that you keep that oxygen to your business flowing, otherwise, you may find yourself sputtering or even choking on lack of cash flow if you’re not collecting on invoices.

Next action item, do you owe anyone a year-end bonus or commission? Don’t forget to pay your employees before December 31st so that it falls in the correct tax year. For example, verify your payroll and independent contractor records because errors can be costly. So, did you report all the wages you paid to your payroll provider so they are included in your team’s W-2 or 1099s? Think about cash bonuses, any client gifts over the gifting threshold, life insurance premiums you may have paid for yourself through the business, and Venmo or PayPal payments to contractors. You want to make sure you’re reporting all of these things either to your payroll provider or to the IRS. Accurate payroll management really is crucial not only for employee satisfaction but also compliance with tax regulations. Deadlines for W-2s and 1099s are in January of 2024, so be prepared to send those out. You yourself, I hope, are not sending those out. Hopefully, your bookkeeper is doing it for you, but make sure you have all that information handy because you do have to have current and correct information for the people you paid, including addresses and tax ID numbers. So, you got to collect that info.

You do have to issue a form 1099-MISC, miscellaneous. So, it’s 1099-MISC or 1099-NEC, depending on the type of the payment to any individual or unincorporated business entity to whom you paid $600 or more in the calendar year for services rendered or for rent. Ugh, I can’t believe I just had to say 1099 MISC. Yuck. Okay. Sorry, but necessary. Let’s get on to the better stuff.

Next item. Do you have inventory? If you’re not doing inventory audits regularly, take this opportunity to conduct an inventory audit. Understand what you have on hand. Identify slow-moving or obsolete items and consider strategies to liquidate or reduce them. Efficient inventory management directly impacts your cash flow and profitability, and that allows you to free up capital and invest in areas that lead to more profits. You really can’t have too much clarity as a business owner. So, count your inventory, understand what’s moving, what’s not, do more of what’s working.

The end of the year is also a great time to evaluate your insurance needs. If you have employees, do you have worker’s comp insurance? Do you have an adequate level of errors and omissions, what they call E&O, or liability insurance? Adjust your coverage as your business grows. When you need insurance, it’s too late to get it, my friend. So, you have to protect against unforeseen risks, right? You never think you’re going to have an insurance claim, but over the course of your business ownership time period, I promise you, you will. Adequate insurance really should give you peace of mind because it safeguards your business in the event of unexpected bad events.

Okay. Now, let’s talk about personal finances. And we’re going to start with insurance. The biggest source of financial debt and even bankruptcy in this country is medical debts. Painful. Wealthy people have health insurance, period. So, definitely review your personal insurance situation. Do you have the optimal health insurance plan for you and your family for 2024? If your employer allows a change, do you know the deadlines to sign up for those? You probably know you can’t just run around changing your coverage all the time. There’s going to be what they call qualifying events in your life that enable you to make changes. And then there’s one open enrollment period, so make sure you know those dates and that’s for your group health plan. Speaking of your health, if you have an FSA, make sure you use up those balances before year-end because they don’t carry over to next year. FSA stands for flexible spending account and those dollars are use it or lose it. I do not understand. Whoever in the government set these plans up makes no sense. You put money in. And what other type of account does your money disappear at the end of the year? Yet that is the way that it is.

Contrast that with the HSA, which is a health savings account, contributions to the HSA do carry over in practicality forever, so you don’t need to worry about spending those down. Also, are your home and car adequately covered for replacement and liability coverage? Do you have a new driver in the household? Maybe you will have a new driver next year. And now is the time to price that additional insurance so you can save for it. Insuring 17-year-olds is expensive. Okay. So, be prepared if you’re going to cover that cost, you’ve got to know it’s coming. You can make other plans if it’s too expensive. Here’s something that’s easy to miss. Maybe you need to add or remove a car, a motorcycle, or a boat from your policy. Also, if you’re a parent, of course, you need a term life insurance policy to protect your spouse, partner, or children in the event that you are no longer walking on the planet. Overall, it can be hard to swallow the cost of insurance premiums. They exist because the cost of the potential loss is much higher. And when you need insurance, like I said, it’s always too late to get it.

So, moving on from insurance, finally, retirement account contributions are a big driver of personal wealth accumulation. They’re also one of the largest tax deductions for most people, and there are many year-end deadlines to keep in mind. In the financial industry, we call these qualified accounts. Tax qualified is a term the IRS uses to say that a group of account types has special tax benefits, like traditional IRAs, 401(k)s, Roth IRAs, and so on. So, either you deduct the contribution when it goes in like a pretax IRA contribution or you don’t pay tax on it when it comes out like a Roth IRA. Those two types of accounts can really save you a lot of money on taxes. I know I don’t want to pay taxes when I can legally and ethically avoid them. I assume you feel the same. So, if you have access to a 401(k), a 457, or a 403(b), your employer contributions really have to be made before December 31st. They absolutely do not count for 2023 if you make them late. For most of us, this comes out of payroll. So, you actually have to be making these contributions throughout the year and you can’t wait until December to start.

The maximum contribution for 2023 is $22,500 for employees that are younger than 50. It is younger than 50. And $30,000 for those who are 50 and over. That’s called the catch-up contribution. Also, consider increasing your contribution amounts for next year. Imagine that. Escalate your savings rate. What could be better for growing your net worth? The base contribution amount for 2024 into a 401(k) was increased from 22,500 to 23,000. So, if you’re under age 50, you can increase that savings amount by a whole $500. But you cannot increase your catch-up amount if you’re over age 50, sadly. What you can do, though, is take your excess cash flow or even the amount you’re willing to decrease your lifestyle spending by and save it in an after-tax account. If you’re contributing to an IRA instead of a 401(k), you can contribute $7,000 in 2024, but that number is only 6,500 for 2023. Increasing your savings amount in each year really is like a fairly magical way to achieve exponential growth in your net worth.

You may also be eligible to contribute to a traditional or SEP IRA or even a Roth IRA. These contributions can be made up to the tax filing deadline or when you file your tax return, whichever is earlier. But the employee 401(k) deferrals are absolutely due by December 31st. It’s important to remember required minimum distributions, we call those RMDs, have to be taken before December 31st each year. So, missing this deadline results in hefty implicit penalties, which is definitely not the kind of surprise you want as you ring in the new year. RMDs are mandatory retirement account distributions when you reach age 72 or 73. For those born before 1951, your RMDs began when you reached age 72, and for those born in 1951 or after, you must start your RMDs when you reach age 73. RMDs are a percentage of the balance of your relevant account on December 31st of last year. You need to contact your financial institution or financial advisor to make that calculation because it’s specific for you and your age and your account balance. You also probably have RMDs if you inherited an IRA. Those would be based on the birth year of the person you inherited the account from.

If you are of the age where you need to take RMDs, one of the best methods of both decreasing your tax bill and giving money to charities you love is called the qualified charitable distribution, the QCD. You could definitely ask your financial advisor about that one if you have charities you love and are looking for ways to give this year. If you love charities or just like people like I do, and you’re not required to make minimum distributions yet, like me, you can consider other gifting strategies, such as maximizing your annual gift exclusion to individuals or creating a donor-advised fund for charities. I like both of those. I use them generously. I love earning money, I love my money, and I also love giving away amounts of money that I can afford. It is a reciprocal, loving relationship. However, you give philanthropically, definitely keep your receipts, maintain records, retain copies of checks, and always let your tax preparer know about the donations or gifts. These all have to be manually entered into your tax preparer’s tax software so that they make it on the return. So, don’t assume anyone else is going to tell your tax preparer about these transactions.

The final piece of information you need to know about charitable donations is that they, just like 401(k) contributions, must be made by December 31st in order to account for 2023. So, don’t delay. For me, I make PDFs out of every single tax or taxable thing I do all throughout the year. I put them in a folder in Box.com called 2023 Taxes, and then at the end of the year, all I have to do is go into that folder and make sure my tax preparer gets all those PDFs. It is like a bit of constant gardening, but it’s a habit that gets me out of hair-pulling time, wasting, and frustration at the end of the year because my memory is not reliable. So, definitely don’t miss those tax deductions because you forgot to tell your CPA. Okay. A lot of effective interaction with the tax preparer is really just making sure that poor person gets all of your files and records. No one else can collect those for you. So, that’s really on you.

All right. Next item, a couple of additional strategic tax moves towards the end of the year may be harvesting capital losses and considering a Roth conversion. Consider harvesting any losses that you might have in your after-tax accounts. So, this means you bought it for, just say you bought a stock for $100 and now it’s only worth 80. So, you have $20 of unharvested losses. If you harvest those losses, which means you sell the stock, now you’ve locked that in. You can wait 31 days and repurchase that same stock or you can diversify and buy a better investment. But that’s not the point. The point is you don’t have losses you can use to cancel out harvested gains in the future. So, if you have $20 of losses, later you have $20 of gains that would have cost you $5 or $10 in taxes, but now you owe nothing. So, carryforward losses are, I use the term, silver lining. There is a silver lining to temporarily losing money in the stock market.

Also, you could consider a Roth conversion for 2023. A Roth conversion involves converting a traditional IRA into a Roth IRA. The entire amount of the conversion is taxable income in the year you complete the conversion. So, you do have to be prepared to pay that bill if you do this. But the benefit of a Roth conversion is the potential for long-term tax benefits. By paying taxes on the converted amount upfront, you can position yourself for tax-free withdrawals in retirement. So, any future gains, earnings, dividends, and withdrawals from the Roth IRA aren’t subject to income tax. I do want to say something about Roth conversions and Roth accounts in general here. It seems to me that in general the media and kind of like the DIY investing public, I mean, sorry to say, but it seems like even most financial advisors and certainly nearly all CPAs have an incorrect thought about Roth accounts, and that is that they’re always better than regular IRAs and they’re just not.

The simple fact of the matter is that Roth accounts are better for you in retirement if your income tax bracket is higher in retirement than it was in the year you converted. This is a semi-complex math question. I’m not going to talk it through fully here because this episode is about end-of-year financial routines and not really a deep dive on Roth conversions. But the simplest way to describe it is that the tax obligation in the year you convert would have stayed in the IRA if you didn’t convert it. So, that amount of money isn’t insignificant and it would have continued to grow in the stock market with the rest of your IRA balance. When you take money out of the IRA, yes, you owe tax on the distributions, but if your tax bracket is the same over time, the net dollars you get to spend in retirement are exactly the same if you choose the IRA or the Roth IRA method. Again, most people seem to not understand this at all but it’s true.

What having those IRA and Roth IRA balances really does for you is give you agility and control in retirement because you’re likely to have a long retirement and the tax codes and tax brackets you’re subject to, just like the presidents will change. Another benefit, there are no RMDs or required minimum distributions with Roth IRAs, so that gives you more flexibility and control over your retirement income.

All right. Let’s talk about how wealthy people relate to their net worth statement. Your net worth should be consistently going up. And in order to know what it is, if it is going up or not, you need to update it. So, if you’re not doing this over the course of the year, add this to your financial routine for end of year. Your net worth is the most important number in your financial life. My clients have a wealth portal that updates their net worth statement automatically, but you may need to track this in Excel or some other software. You want to update it. Keep track of it. On the asset side, make sure you’re adding the balances of your real estate owned, your investments, your employer-based savings plans, any stock options you own, and maybe savings accounts. On the liability side, any credit card balances you don’t pay off monthly, any student loan debt or mortgages, also, of course, personal loans outstanding.

I don’t tend to include my checking account balances in my net worth. Okay. I think of those as cash. I don’t include the value of my cars or my jewelry or clothing because I’m not going to sell that stuff and use it in my financial planning or my financial life for spending. Those are assets that I own. Unless I’m in some kind of weird sell-off position, I’m definitely never going to spend my car. I’m going to drive it until I sell it. I’m going to use the cash proceeds from the sale to buy my next car so that money is in play. And that’s what the net worth is, is that the money that’s earmarked for your eventual financial freedom. You’re tracking your investable assets or what you can spend in retirement, and then you’re tracking your overall net worth, including your home or other real estate.

Here’s some extra credit for you. I actually track investable assets and home equity separately for my clients because most of us won’t be spending our home equity in retirement. So, really in practice, those two things are in different buckets, and assets minus liabilities equals net worth. En voilà! As we close the books on 2023, I look forward to the opportunities that 2024 holds. Don’t forget your financial journey is not just about the numbers on a spreadsheet or savvy tax strategies. It’s really about fostering a mindset of possibility and empowerment. True financial well-being extends beyond bank account balances. Having sufficient financial resources is key to financial well-being, but you can still have fun on the journey. Don’t get too serious or significant about your finances. You have many years to live and you can afford small setbacks. You’re building the wisdom you need to break through to brand-new levels of effectiveness and fulfillment. Wealth preservation is a learned skill set, I promise you. So, you’re learning.

So, that should bring you to the end of 2023. Now that you’ve completed 2023, you’re actually ready to create 2024. And this is where it gets fun. I’m not going to lie. Completing the year financially, it’s not super exciting. I do it because it’s necessary and because I feel great when I’m organized. I do it every year. I’m reliable to do it, but it’s not nearly as fun as the creation part that comes next. Really, you can only create goals powerfully when you’ve organized, viewed, and completed everything you’ve done up until then. So, now 2023 is complete. You know your financial position in the business and you know your personal net worth, you can create meaningful and inspiring business goals that actually move you closer to your personal financial or lifestyle goals.

So, some ideas. Hey, in 2024, maybe you want to double down on your most profitable revenue stream and cut things that haven’t been serving you or your team. Maybe you want to add a team member that can help you get to where you want to go faster. Maybe you want to start working on that book you’ve been thinking about for years. Maybe you want to raise your prices. Here are some other ideas for 2024. Hire someone to whom you can delegate the things you’re not great at or don’t like doing. Maybe you want to start a podcast or maybe you want to create a company 401(k) plan. I love that I have a company 401(k). I think it’s great for my employees. It’s great for employee retention and I feel really good about doing that for them. Start a personal, either a personal or business charitable gifting program. I give money to lots of charities all year round and it’s something I feel really good about. Put your 2024 personal time and vacations on the company calendar. Now, if you put your personal time, your vacations and all that, I actually have days scheduled just to think deeply about what I want to teach next or what I can create to better serve my clients. So, schedule think days.

It’s really an incredible leverage point. If you’re not on the payroll in your business in 2024, put yourself on payroll. You got to have consistent income. You just have to have it. Business and the economy might be inconsistent. They’re a little bit variable, but your personal bills are pretty darn consistent, right? Open up a profits account and set it up to auto-transfer 1% of your revenues to that account. Start with 1% and then figure out how to get to 5%. That’s an exciting project, right? That’s worth your time. Use your profits to grow your net worth. Use your net worth to create financial freedom, which is what I’m here talking about.

I hope you enjoy this end of your checklist. If you have additional things that you think my team and I should add to the checklist, send them to me at hello@hendershottwealth.com. That’s hello@hendershottwealth.com and thank you for being a loyal listener. May your holiday and New Year’s celebration be filled with hope, optimism, fireworks, and may your only pain be champagne. Here’s to a thriving future.