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A Financial Health Checkup for the New Year

With encouraging news about highly effective COVID-19 vaccines, it’s possible the worst of the pandemic may soon be behind us. However, the pandemic’s effects on our health and wellness, which includes our financial health, will not end immediately.

We’ve written before about how better financial health literacy can lead to a less stressful, happier and more confident life – which is especially timely given the year we just endured. What can we do to improve our financial health in the new year? The first step is to take inventory of exactly where we stand. This financial checkup is no different than a periodic checkup with our health care provider or performing regular maintenance on our vehicle.

Check Your Credit Score

Our credit score is a snapshot of our life that financial lenders and some employers use to help determine our financial trustworthiness. If you don’t already regularly review your credit score (available monthly from most financial institutions, such as your credit card company or mortgage lender) you can request a free copy of your credit report once a year from Equifax, Experian or TransUnion.

Our credit score can affect job and apartment applications, mortgage rates and credit card approval. Low credit scores from negative credit reports or insufficient credit history can contribute to unemployment and homelessness in extreme cases. Receiving and reviewing your credit report allows you to correct any errors and provides insight into how to improve your score, such as using less of your available credit.

Higher credit allows borrowers to access loans with the most favorable financial terms, freeing up more money for other purposes. Here are six reasons to build and maintain a good credit score:

  1. Significant savings on interest rates on big-ticket loans
  2. Better terms and availability on loan products
  3. Access to the best credit cards
  4. Insurance discounts
  5. More housing options
  6. Security deposit waivers on utilities

Check Your Tax Withholding

The month of January is a great time to review your tax withholding, which affects the amount of taxes taken out of your paychecks. Having an idea of our tax obligations ahead of time may relieve stress by reducing the chances of a surprise large tax bill due by the April 15th tax deadline.

The U.S. Internal Revenue Services (IRS) suggests checking your withholding early in the year, when tax law changes and after life changes, such as marriage, divorce or the birth of a child. The IRS has a tax withholding tool to help taxpayers make sure they have the right amount of tax withheld from their paychecks.

While the tax code is complex, put simply, receiving zero refund and owing zero additional taxes at the end of the year means you met your tax obligations exactly. Receiving a tax bill at the end of the year occurs when less taxes than required to meet our tax obligation are taken out of our paychecks throughout the year. Receiving a refund happens when more taxes than required are taken out of our paychecks throughout the year. In this scenario, the taxpayer receives a refund for the tax overpayment (without interest.)

Building on a Financial Health Checkup

Actively monitoring our credit score and managing our tax obligations are part of a healthy personal finance strategy, which also has a positive effect on our overall well-being. There are many additional areas of personal finance that could benefit from a checkup this time of year, such as reviewing any debt repayment plans or determining whether it’s a good time to refinance a mortgage.

If we’re not worried about money, there is more emotional bandwidth available for other aspects of our lives that may need attention. If the difficulties of 2020 taught us anything, it’s that tough times are inevitable, but we can plan and execute our way to a better tomorrow.

[Matthew Brown is the LHSFNA’s Health & Welfare Specialist.]

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