Three actions to take after you file your tax return

Chances are your tax return is completed and payments (if any) have been made.  This is a great time to reflect on the remaining eight months of 2023.  How are you progressing towards your personal and financial goals?  A periodic check-in can make the most of your time if you have some to spare.  Here are three steps to take now that support better financial decision making.

Taxes

Based on the amount of federal and state income tax you owed, it may be valuable to increase your w4 withholdings.  How’s your total income looking this year compared to last?  Will bonuses or stock awards be received, or will you be changing jobs soon?  If so, adjusting your tax withholding is worthwhile.  How?  The best approach is logging into your employer portal and increasing your number in both federal and state categories.

Just about all professionals and families will need to make proactive adjustments regardless of their income.  After tax reform years ago, a higher level of diligence must be applied in managing personal withholding.  The key is trial and error, so you still have net spendable dollars after each pay period.  This avoids the inevitable surprise each April and is more reflective of your true cash flow.

Here’s an example assuming you owed $10,000 on your federal and $5,000 on your state tax return.  Take your pay frequency and divide it by the above tax liability.  Two paychecks each month, eight months left to the year, leaves 16 pay periods to catch up on.  This adds up to increasing your federal withholding on your w4 by $625 a pay period.  $625 x 16 pay periods equals $10,000.  Repeating the same process for state taxes, $313 a pay period x 16 periods will generate $5,000 more to the state.

Why now?  Acting while taxes are still top of mind allows you to get ahead and stay ahead.  It also leaves more room for spending on “fun” priorities.  With next year’s taxes addressed, maybe you plan a spring break trip?  Or perhaps you can book this year’s vacation earlier than planned?  Being proactive with tax withholding minimizes what is owed and increases cash flow confidence.

Investing

Don’t look now, but the S&P 500 is moving in the right direction when compared to last year.  Despite all the doom and gloom in daily headlines, the 510 best companies in American continue to expand.  Why?  Companies are created to deliver a product or service or both to consumers.  Businesses must continue to evolve to generate profit margins to stay alive and meet customer needs.  If not, businesses will be replaced by companies who are more competitive and responsive.

Really smart men and women are running these companies and making daily decisions, some with the help of AI.  Bottom line, companies need to continue growing, that’s capitalism.  If something is not working, then companies may pivot and try something new.  If things are working, then stock prices typically expand over time.  It’s completely natural for things to be working well and for company prices to still flounder.  The market sets expectations on price and value of all companies, no sense trying to control this.

Here’s what you can control, the number and allocation of companies you own.  We mentioned large US companies above, there are thousands of other small and mid-sized US companies that should be considered as well.  Don’t forget companies doing business outside the US too.  The best way to own thousands of these companies is through exchange traded funds, or ETFs for short.  Here you gain access to all companies, in all industries, and all geographies.  The question becomes how much of each?

That’s the job of your financial plan.  Based on your timeline and what you want to achieve, your financial plan should be updated to supply guidance on your investment choices.  Goals and planning first, portfolio second.  If your goals and timeline aren’t changing, then it’s likely your portfolio shouldn’t be changing either.

One change that should take place annually is rebalancing your investment accounts.  Investment values are still depressed when compared to January 2022 levels.  Annual rebalancing is intended to move investments back to their original percentages.  This single act, once a year, has a significant influence on how your investments may perform in the long run.  Proactively rebalancing or through automation aids your portfolio in keeping the correct balance of investments.

Cash Reserves

After cutting checks to Fed and state for income taxes, replenishing your cash levels may be necessary.  The best way to do this is purposely setting dollars aside for short term needs.  Keeping your cash in accessible accounts tends to work best.  You may go a step further to segment your cash so summer vacation, fall tuition, and your emergency dollars aren’t all sharing the same space.

Maintaining and updating the right liquidity levels allow you to go live your life (and address the expenses that follow).  This ensures your investments stay invested so they may continue compounding.  When challenges arrive, they typically involve cash flow.  Recognizing patterns and your need for reserves supports sustainable spending.  Short term liquidity supports a long-term financial plan.

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