Your five-step New Year’s financial checkup

It’s time for your New Year’s checkup

It’s not unusual to view assessing your finances like going in for your annual physical: really easy to put off, until it’s too late. In either worst case, something really bad can strike, like a medical problem that early detection would have prevented or a financial setback that could have been foreseen—and avoided.

But those are extreme scenarios. The most common problem with avoiding your finances is that not knowing leads to real agita. Knowing we should be tending to something (and aren’t) lets our imaginations run wild. I’m suggesting you confront that nagging feeling now, at least in terms of your financial life. Whether it’s the unexamined terms of a student loan repayment plan or the cash sitting in your checking account that you know could be earning more for you, here’s a five-step, bite-the-bullet plan to tackle the unknowns, with helpful links so you can take action ASAP.

1. Pay down debt the smart way.

Take a look at all of the money you’ve borrowed—credit cards, student loans, auto loans, mortgages, and so on. Write down what you owe, to whom you owe it, and what interest rate each charges. Confronting the actual numbers can provide relief after all that time putting your head in the sand. Next, set up automatic monthly payments on all your debts. This will ensure you make timely payments, even if they’re just the monthly minimums, and avoid hits to your credit score.

Once that’s done, list your loans from highest to lowest by interest rate—not by the size of each loan’s balance. The reason: People often put more money toward paying off their bigger bills because those are the ones that feel the most frightening. Or, on the flip side, they pay down the smallest loan first, to at least knock one out. (Small wins!) But neither of those approaches makes financial sense. Your goal should be to borrow with the lowest interest. One way to do that, after you’ve organized your loans by their rates, is to transfer money from a high-rate loan to one with a lower rate wherever possible—say, from a credit card charging 17% interest (the national average at this writing) to one charging 10%. Next, if you have a chunk of money sitting in a savings account earning minimal interest, use it to pay off your highest-rate loan. When you’ve zeroed out that debt, move on to the loan with the next-highest rate, continuing down your list.

“But wait,” you ask. “All of my available savings? I’ve worked hard to accumulate that money. Isn’t it a waste to use it to pay off debt?” The answer is no, it’s not a waste, and here’s why: When you pay off a credit card with a 17% interest rate, you are essentially paying yourself 17% interest, tax-free. Let’s say you owe $1,000 on that card, and you happen to have $1,000 in a bank savings account—earning a measly 1% interest. Keep that grand in the bank for a year and you’ll earn $10; meanwhile, you’ll pay $170 in interest on the credit card. Math: You lose $160. If you instead use that savings to pay off the card, you’ll earn no interest, but you’ll also pay no interest. Again, math: Negative $160 is less than $0. It’s better to break even than to lose $160.

2. Reckon with retirement.

My refrain about retirement saving is this: Set it and forget it. Except right now. It’s time to lift the lid, see what’s cooking, and ask two basic questions.

One: Can I put in more?

Two: Am I investing it well?

Take the first question. Ideally, you want to put away at least 15% of your take-home pay into a work-sponsored 401(k), or into an IRA (Individual Retirement Account) that you get on your own. There is no magic to that 15%; if you can do more, great. And if you feel like it’s a ridiculously high amount to put toward retirement, I’d say—and I know this is annoying—do it anyway. (The first edition of my book Get a Financial Life: Personal Finance in Your Twenties and Thirties came out in 1996, and many people who are now in their fifties have told me that the 15% rule—as ludicrous as it sounded to them two decades ago—is the reason they now have hundreds of thousands saved for retirement.) Comb through your expenses before deciding you can’t meet that percentage. And though it may seem odd to focus on retirement when you’re young, youth gives you the one asset you don’t have later on: time. That’s what turns manageable, regular deposits of money into a nice nest egg—thanks to the magic of compound interest.

Now, the second question. Whether you are new to investing or have been doing it for a while, check to make sure you have your retirement money in low-priced, diversified investments such as low-cost index funds or index ETFs. History has shown that these passive investments perform just as well, on average, as funds managed by highly paid stock pickers. Vanguard, which charges some of the lowest fees in the business, has an expense ratio of 0.03% for its main ETF (Total Stock Market) and 0.04% for its main index fund. If you’re getting an IRA, you can open it there. (Note: I don’t officially endorse any financial products.) If you’re limited by the options of a work-sponsored 401(k), make sure to check the annual fees of the various choices you’re given. In most cases, the lower the fees, the better.

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3. Are you ready for anything?

Poll after poll shows that a big chunk of the American public doesn’t have enough money set aside to pay for a $1,000 medical bill or other emergency. Take a look at your own emergency savings cushion to see if you’re part of that vulnerable 60%—and whether you can take a small step to change that as part of your financial checkup. If you’ve paid off your high-rate debt, secured health insurance (a must), and juiced up your retirement savings, it’s time to begin stashing away three to six months’ worth of living expenses. This part is easy: Ask your employer to automatically siphon a small percentage of your paycheck into a separate bank savings account. In many instances, these contributions can be as little as $50 per payday. The point, once again, is setting it up automatically.

4. Full retail disclosure.

We’re going shopping!…in a sense, through all your major purchases from the past 12 months. (Odds are you’ve got the receipts in your email, or via bank and credit card statements.) Write the price of each item on a separate sticky note—for those who like to color-code their angst, use a shade like “Shame Green” or “Why the Hell Did I Buy That Yellow”—and tag each item. Now, take a “re-shopping trip” down credit card lane and ask yourself: “Did I get my money’s worth?” And if so: “Was it the best time to buy it? Or was it simply an impulse purchase?”

Consider whether that money could have gone toward something more constructive—saving for a home, paying for education, or killing that aforementioned credit card bill, for instance. This is not an effort to suck all the joy out of that buttery leather jacket you splurged on—you look fabulous in it. I’m thinking more about that set of AirPods, one of which you lost after three days, or the flat-screen TV that, let’s face it, you hardly use because you’re always at work, or streaming movies on your phone. This isn’t about looking back and feeling bad. Rather, it’s about revisiting last year’s spending and seeing if there’s any takeaway for the new one. And, by the way, maybe you don’t have any spending regrets—and that’s good to know too.

5. Score yourself.

Last of all, look at your credit reports and credit score. To check your score for free, simply go to Credit Karma. Go forth unafraid—truly. Even if your score is less than ideal, there are concrete steps you can take to get back on track. A good score—one that will get you some of the best deals on loans—is 720 and above.

Next comes requesting and perusing your credit reports. Again, the real danger here is in not looking: Credit bureaus are notorious for making mistakes. You’ll want to catch any errors before they hurt your finances. Plus, this is also free: You’re entitled each year to one free credit report from each of the three major bureaus: Equifax, Experian, and TransUnion. Just fill out a request form at If you spot something fishy as you examine any of your reports, contact the appropriate credit bureau right away (,, and This is one more of those hanging-over-your-head tasks that will take a real weight off once you perform this checkup. And dispelling that feeling of dread is worth a lot.

Talking about money can leave you tongue-tied. My weekly newsletter is full of financial conversation starters.

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