10 New Year's Resolutions to Get Your Finances in Shape
Charles Schwab Co.
Each year represents a new beginning, but sound advice is timeless.
Here are our top 10 ways to get your personal finances off to a
great start in 2006.
Resolution No. 1: Pay off those credit
cards
Resolve to get rid of all consumer debt that's not tax
deductible—your credit cards, for example. Develop a plan to pay
down your balances and get started as soon as possible. Short-term
rates are on the rise, so it's more important than ever to look into
a tax-deductible home equity loan or line of credit to pay off your
more expensive, non-deductible consumer debt, but only if you can
control the debt and aren't putting your home equity in jeopardy.
Resolution No. 2: Track your spending
The B-word—budget—sounds too constraining, so let's call it
cash-flow planning. Try it for 30 days and you might be surprised at
the opportunities you have to cut back on your spending. With all
that free cash flow you can start paying off your credit cards (see
Resolution No. 1). Plus, if you haven't already, you should set
aside three to six months' living expenses in a money market fund1
or savings account to be tapped in case of emergency. If you have
money left over each month, invest it!
If you're retired, or about to retire, the budgeting process can be
especially important—try separating your expenses into
non-discretionary (e.g., food, utilities, medical, etc.) and
discretionary (extra "fun stuff") so you'll have a better idea of
how much must come out of your portfolio on a regular
basis.
Resolution No. 3: Determine your
marginal income tax bracket
Knowing your marginal income tax bracket can help you make all sorts
of important financial decisions, including:
- How much to withhold from your paycheck—withhold too little
and you may come up short on April 15. Withhold too much and
you're giving an interest-free loan to the government all year.
- Whether taxable bonds or tax-free municipal bonds make sense
in your taxable accounts. And don't forget that qualified
dividends are taxed at 15%, at least through 2008 under current
law.
- Whether the
alternative minimum tax is an issue for you.
- The potential impact of charitable gifting strategies,
including gifting to a donor advised fund or charitable
remainder trust.
- Whether you should defer some income and/or accelerate
certain deductions this year.
When your tax professional prepares your 2005 return, ask for a 2006
projection (or run one yourself using tax preparation software).
Resolution No. 4: Give your portfolio a
checkup
If you didn't get around to it in December, now is the time to get
your asset allocation in line with your goals, time horizon and risk
tolerance. You
can
use any capital losses or capital loss carry-overs to offset current
gains as you realign your portfolio.
Diversify your investments and revisit your portfolio every six
to 12 months (or when your circumstances change) to make sure you're
on track.
While you're at it, check your individual stocks, bonds and mutual
funds to see how they're performing and whether they still suit your
situation—remember, buy and hold doesn't mean buy and forget.
Resolution No. 5: Max out on retirement
savings
Contribute to your retirement accounts as early in the year as
possible. Even if you can't contribute the maximum, contribute as
much as you can, especially up to the point of any employer match.
Consider a Roth IRA, if eligible, or the new Roth 401(k) if your
employer offers one. Either way, don't forget the special catch-up
contributions for people age 50 and older.
2006 federal limits for retirement
accounts
| Account |
Contribution limit |
Catch-up contribution |
| 401(k), 403(b) and 457 |
$15,000 |
$5,000 |
| SIMPLE IRA |
$10,000 |
$2,500 |
| QRP/Keogh and SEP-IRA |
20% of net self-employment income, up to
$44,000 |
None |
|
Individual 401(k) |
20% of net self-employment income plus
$15,000, up to $44,000 |
$5,000 |
| Traditional IRA and Roth IRA |
$4,000 |
$1,000 |
Resolution No. 6: Save for your children's or grandchildren's
education
Open a
529 college savings plan and/or a
Coverdell Education Savings Account (which can be used for K-12
as well as college) for your children or grandchildren.
Contributions aren't tax deductible (except for some states that
give a state income tax deduction for contributions to in-state 529
plans). However, when you take out money to pay for qualified
education expenses, it's free from federal income tax.2
You can contribute $2,000 per year to a Coverdell Education Savings
Account. For 529 plans, there's no annual limit—each state's plan
has its own lifetime limit, typically over $200,000.
Resolution No. 7: Review your insurance
coverage
Check your homeowner and auto policies to see whether your coverage
and deductibles still make sense. Be sure you have adequate life and
disability insurance, that you aren't paying too much for the wrong
kind of coverage (assuming you still need life insurance at all),
and that your beneficiary designations are up-to-date.
Review your health and dental coverage elections with your employer.
If you have your own medical policies, be sure your coverage is
adequate and the rates are competitive. Consider the potential
benefits of additional liability coverage with a personal umbrella
policy, as well as whether long-term care insurance makes sense.
Resolution No. 8: Take care of your
estate
Even if you're not concerned with estate taxes,
you should still have an up-to-date will in force to make sure
your final wishes are carried out. You should also have durable
powers of attorney and health care in place, appointing someone you
trust to handle your affairs in the event you become incapacitated.
If you have significant assets in states where the probate process
can be both costly and time consuming, consider a
revocable living trust. Even with the uncertainty surrounding
the estate tax, spouses with taxable estates should consider a
credit shelter bypass trust to preserve the lifetime exemption of
the first to die.
Finally, check all the beneficiary designations and titling on your
various bank, brokerage and retirement accounts.
Resolution No. 9: Update your personal
financial plan
If you've previously had a financial plan created, sit down with
your advisor to update your plan. If you've never gone through the
planning process, now is a good time to seriously consider a
professional, comprehensive review of your financial situation. Or,
you may wish to focus on a specific goal, such as retirement. When
you put a plan in place, you greatly enhance the chances of
achieving your financial goals and dreams.
Resolution No. 10: Stay balanced
Financial planning is only a means to an end, the achievement of
your life's goals, not an end in itself. Stay balanced, keep your
perspective and be the master of your finances, not the other way
round. Remember, all that glitters is not gold. Above all, have a
happy, healthy and prosperous 2006!
1. An investment in a money market fund is
not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Although funds of this
type seek to preserve the value of your investment at $1 per share,
it is possible to lose money by investing in the fund.
2. Federal tax-free status is effective from Jan. 1, 2002 through
Dec. 31, 2010 in accordance with the Tax Relief Act of 2001. In
2011, all provisions of the Tax Relief Act will expire and tax
treatment will revert to rules that existed prior to Jan. 1, 2002
unless extended by Congress. If the law isn't extended, 529
withdrawals would be taxed at your child's rate. |
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