Happy New Year! As we enter the second decade of the century, reflect a moment on how you did with financial planning in the first decade. For folks who earned an average of 50K annually and maximized their contributions (7%) to a Roth IRA, you have a nest egg of 35K in your Roth alone. What is my point? If you haven’t invested at least 7% of your income, you aren’t on track for financial independence, unless inheritance is in your cards.
There is nothing like a little cold water to combat a New Year hangover. But there is a cure. As I mentioned in my last article, ROTH IRA contributions can be made for 2009 until mid-April of this year. But before you rush out and do anything, please consider the following:
1. Do you have a new year’s budget? Keep it simple; just ensure you automate “paying yourself” first with a direct allotment. Ask your payroll department how.
2. Do you have adequate emergency savings? Are you prepared for a temporary reduction in pay?
3. Do you have a debt reduction plan? Make a resolution to take positive steps towards eliminating it.
4. Are you in a position to capitalize on the low interest rates and refinance or purchase a home?
5. Are you maximizing your company’s matching contributions to your 401K/TSP?
6. What is your household income? There are limits to the type of IRAs one can contribute to based on your adjusted gross income.
7. What is your tax liability for your 2009 income? You don’t have to lose sleep and wait until April to know if you owe or will be due a refund.
8. Do you qualify for the first time ($8000), or repeat ($6500), home buyer’s tax credit?
9. Will you be receiving any proceeds from gifting relatives or friends? Limit for 2009 is 13K per person.
10. Have you reviewed and rebalanced your portfolio allocation since 03/09/2009. The rebound in the S&P has been 72.4%.
11. Will converting your tax deferred accounts to a ROTH IRA be a good strategy for you?
If this list makes you want to get off the “financial independence” bandwagon resolution now, just take one step at a time. By tackling steps 1-3, you will be on a better path than last year. So start with a budget. A budget is a plan within a plan but it needs to be in writing for accountability. Get someone (your spouse is perfect) who can help you be accountable for following it. Be realistic, but be tough. Be the CEO of your personal finances and view them as your “business.”
I often ask my clients (and my wife), “what makes you sleep best at night”? The answer – “Emergency Savings!” What amount you should have is based on individual comfort and job security. There is no hard fast rule, but several months of rent or mortgage should be available. By the way, vacations paid for in budgeted cash are more fun than those that show up on your credit card! The savings cornerstone is the glue that holds a financial plan together, particularly in tough times.
Is it time for debt reduction? Throughout this recession the overriding factor in the slow recovery has been the credit crunch. The banks stopped lending easy money to businesses and individuals, and the music ceased. It is a wakeup call that we as Americans are living on more than what we make. The first step to wake up from this nightmare is to know precisely what one earns and budget (there’s that word again) a set amount monthly for debt reduction with a priority to the highest interest rate first. Be honest with yourself. If your circumstances call for it, find a reputable debt reduction company and get the assistance you need. Though painful, you will find this step liberating!
Before going out and securing a debt consolidation loan, look first at what you have available within your own portfolio. If you have enough equity in your home, a home equity line of credit or a low cost refinance of your mortgage can save you a lot in interest payments, and those payments are tax deductible. Neither a personal loan nor your credit card interest have any tax savings. Interest rates have remained at near all time lows, so a refinance should be a consideration. What do you think a bank would prefer you to do? Just look at a few lending institutions and note the difference between personal loans and mortgages rates.
Do you like free money? If you have a matching 401K and are not maximizing the amount your employer will match, you are walking away from free money. If it is 4%, then contribute as much of that as possible.
So, 2010 is here. Make it a good year to start your plan. You may have to make some life changes, but those positive steps will make your financial journey filled with more confidence and restful night. I wish you a prosperous and safe new year. I am always happy to answer your questions. My contact information is below.
Jon Vinge
858-736-9197
Jonvinge@befinanciallysound.com |