Financial Fridays
Take Control of Your Finances in 2009!
By Bill Jenkins - Countybank
Jan. 06, 2009 at 11:22 AM
Things to think about for the New Year
1) Did you incur debt over the holidays?
Develop a plan for reducing or eliminating your debt as much as possible. Focus on consumer debt first which typically carries the highest interest cost and provides no tax benefit. Getting debt under control may improve your credit score which may earn you better interest rates on credit cards and loans as well as get you lower rates on your insurance. We’ll be going over tricks & tips to do this in the next segment on January 9.
• Here’s one trick to help you get started. This is called the “Power Payment.” If you have a few different credit cards, make minimum payments on the largest balances, while paying extra on the account with the smallest balance first. You’ll see progress quicker, and feel better about your plan. Then when you pay it off, add the payment you were making on the smallest balance to the payment on the card with the next largest balance until it’s paid off, then add that payment to the next largest, and so on.
2) Set up an emergency fund with an ultimate goal of 3 to 6 months living expenses set aside.
We had a question from a viewer about how to get started saving in 2009 – what type of account to start with, and so forth. An emergency fund is a good place to start with a regular savings account. If you don’t have a savings account, open one and link it to your checking account and set up an automatic transfer for each payday. Start small with something you can live with. The key is to establish the habit, even if it’s only $10 a pay period. Once the balance grows, you may be able to get better interest rates by moving to a money market account or short term CD. If you’re wondering where to find the money to save, we’ll have some tips for that on the January 9 show.
3) Take advantage of any benefits your employer provides, such as 401(k), flexible spending accounts, different types of insurance.
Most 401(k) plans offer quarterly enrollment or changes in deferral amounts so go ahead and sign up for the next available enrollment.
• If possible, contribute at least as much to your retirement plan at work as your employer is willing to match. Remember, you get a tax break for everything you contribute to a 401(k) and it grows tax deferred. The employer match is like free money. Don’t leave any on the table.
• Every time you get a raise, make sure part of it goes to increase your contributions to your 401(k). Paid off your debts? Increase your 401(k) contribution!
4) If you have a flexible spending account at work, make sure you have used all the funds in it. Most employers give you a couple of months into the New Year to request reimbursement from these accounts so locate those receipts/expenditures and turn them in!
Any tax savings opportunities left now that the new year has begun?
1. If eligible, contribute to your IRA. Although the new year has begun, you can still contribute to your IRA up until April 15 and deduct the contributions on your 2008 tax return, up to $5000 or $6000 if you’re over age 60.
2. SC Future Scholar 529 Plan for college saving. You can contribute to a 529 plan for your children or grandchildren until April 15, 2009 and still deduct those contributions on your 2008 SC Sate Income Tax Return.
3. Prepare a spending plan for 2009. Don’t make a budget. Budgets are very restrictive and for most people, they just don’t work. You know you’re going to spend money, so why not plan the best way to allocate your resources and meet your goals.
• Before you start, carry a pocket size spiral notebook and pen or pencil with you for a week or two. The kind you get from the drug store for 50 cents. Write down everything you spend. Yes, I mean everything!! It can be very eye opening to see where your money goes. I’ve never had anyone do this exercise that hasn’t found $25 to $50 a month to use to pay down debts or save for their emergency fund!
Once you have developed your spending plan, compare it each month to what you actually spend in the various expense categories. In other words, use your budget as a tool throughout the year. Don’t just put it together and store it in a drawer.
Consider having a personal financial plan prepared.
You’ll most likely start pulling your information together over the next several weeks in order to prepare your taxes. Why not make copies of that information, along with a few other pieces of information like insurance policies, retirement plan statements, and family spending plan and put together a comprehensive personal financial plan? You’ll feel more in control of your finances, find the money to start saving if you need to begin, and it doesn’t need to be intimidating or hard. A comprehensive plan should cover:
Investments - Education Plans -Taxes
Retirement - Estate Plans - Banking
Insurance - Debt Management
Most people don’t know if they are saving enough for retirement, prepared for the cost of their children’s education, if their wills and powers of attorney are up to date, they the have the right kinds and amounts of insurance, or if their assets are invested in a way that aligns with their risk tolerance and time horizon.
Usually, we’re just too busy, and only deal with the financial issue at hand (“Oops! Tax Time,” or “Gotta add the new car to my insurance policy”) without ever taking the time to look at our financial life in a comprehensive way; when in fact, all these different areas need to work together with each other in order for us to live our best lives.
This is what we typically uncover in a comprehensive personal financial plan:
1) Being over/under insured
2) Paying too much for insurance
3) Missing out on tax saving opportunities
4) Not saving enough for retirement
5) Spending down retirement funds too quickly
6) Not understanding your investments
7) Taking more risk than you’re comfortable with (or investing too conservatively)
8) Being unprepared for college expenses
9) Legal documents such as will and powers of attorney not being in place or being outdated. Everyone needs these. We’ll have a future episode just about these – they’re that important for everyone. You’re not too young or too old, rich or poor to not have a will and a POA. They’re that important!
If all this is too overwhelming for you, you can get help. There are online resources available to help you with many of these questions. Many reputable financial services providers, such as Countybank, offer assistance with financial planning, so contact your provider, or if you don’t have a provider who offers these services, consider switching to one who does. Want more personalized attention, or have another question you’d like us to cover? Use the form included on the page!
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