This is my 13th year of writing “top 10” investing tips to get you thinking about changes you can make to your finances for the coming year. As always, I wish you a healthy and prosperous new year.
Financial planners have embraced the idea of helping people identify their life goals and help their clients achieve them.
Money can be the means to an end or a way to keep score, but it makes for a lousy proxy for measuring what you’re getting out of life. When you know what you’re working toward, you’ll be more committed to investing for those goals.
Identifying your life goals is so much more than just a bucket list, but that list could be part of the package, too.
What do you want to accomplish while on this earth? What do you need to get it done? Revise, re-evaluate and resubmit your plan as necessary, but don’t let the pursuit of wealth be the goal.
You can do one of two things with your income — spend it now or save it for later. Economists call it the consumption/investment decision. If you consistently spend more than you make, you aren’t putting anything toward your goals. Put together a spending plan for your income, and stick to that plan.
I like to call it a spending plan rather than a budget because budgeting, like dieting, is a chore, while a spending plan has you choosing how to allocate your income.
Keep track of your spending. Whether it’s with an app on your smartphone or on a scrap of paper you keep in your wallet, track your spending to see if your spending plan matches your spending reality.
This is easy to say, and it’s not so easy to do. A commitment to living within your means is a first step toward working toward the future. When you finance current consumption with credit, you’re reducing future spending by that expense plus interest.
If you have a big credit hangover, you’ll have to take your medicine and get out from under your past spending, too. Deleveraging is all the rage for banks, countries and consumers. It just means there’s less debt in the mix. Debt restructuring can free up some money in the monthly spending plan, but it doesn’t pay off debt. It just changes the terms. Don’t make that decision lightly, especially if you’re considering a cash-out refinancing of your mortgage to pay off your credit cards. And don’t run up the card balances all over again.
For employers who make matching contributions to their employees’ retirement plans, it’s common for them to match 50 cents per dollar that you contribute up to a cap. The cap is typically 3 percent for the employer’s contribution if the employee contributes 6 percent of his salary.
What’s not to like about making 50 percent on your money before you even decide how to invest it?
Many of us aren’t saving enough for retirement. Turning down a helping hand from our employer doesn’t make sense. Start building a retirement war chest. You’re going to need it.
Keeping some money in reserve for financial emergencies is a sound practice. For most people, it’s where they should start investing. An emergency fund is a pool of money typically invested in liquid investments, meaning the investments can be converted to cash without penalty or reducing principal.
A common rule of thumb is to have three to six months’ worth of living expenses available in your fund.
The current trend in retail investing is for investors to have an investment-policy statement developed with their investment adviser. More comprehensive than a brokerage agreement, it spells out the investor’s goals and objectives, asset allocations, liquidity requirements, risk tolerance, etc., and how the investment adviser will work to meet those objectives.
You may not have a policy statement in place, but your portfolio is invested in some combination of investments. I’m suggesting that you look at how you’re invested and consider expanding the number of asset classes held in your portfolio. Go beyond the normal division of stocks, bonds and cash, and dig a little deeper. If your portfolio is U.S. centric, consider adding an international component. Divide that international component between developed and emerging market economies and look at both bonds and stocks. Get professional help as needed, which may include professionally managed mutual funds.
Investment allocations in financial securities are typically split between stocks, bonds and cash. A diversified portfolio will have some exposure to all these asset classes. The investment allocation that’s right for you will depend on your risk tolerance, investing goals and market outlook.
You may decide that an allocation of 50 percent stocks, 30 percent bonds and 20 percent cash is right for you. If this year’s stock performance brought your stock allocation up to 60 percent, then rebalancing the portfolio will get you back to your target allocation.
Taxes and considerations, such as estate planning, can influence your ability to rebalance your portfolio. Consult with your financial planning professional and tax adviser before reallocating your investments.
Look at your banking relationships from the deposit and the credit side. Do you have free checking? Are you earning interest in your checking account? What’s the fee structure for out-of-network ATMs? Do you have to pay to talk to a teller? What kind of interest are you paying on your credit card? Is there an annual fee? If you’re earning miles or points on your account activity, is that affinity program still working for you?
Changing your banking relationships isn’t something to take lightly. It’s a hassle to switch the direct deposit of your paycheck, direct debits on your loans, and to migrate your online banking and bill paying. That said, take a look at what’s out there and see if the grass is greener at another financial institution.
I’m trying to get rid of the clutter in my life, so I can focus on the things that are important to me. I’m downsizing my house, cleaning out my closets and getting rid of the things that don’t make a difference to me.
Most of us are juggling multiple responsibilities. Between work, family, friends and school, there just aren’t enough hours in a day. With no plans on the horizon to move to a 28-hour day, you’ll just have to figure out how to best use the 24 hours you have. A seminar on time management can help. So can turning off the TV.
Simplify. Seek a balance.
As an alternative to paying a monthly fee for credit monitoring services, I like the option of freezing your credit file. Freezing your credit file is a great way to protect against identity theft. It’s a bit of a nuisance, but keeping others from accessing your credit is worth the inconvenience.
A security freeze stays in place until you remove it. If you want to apply for new credit, you can request a temporary “thaw” in your credit, so the lender can request and review your report. You need to freeze your file with all three consumer reporting agencies — TransUnion, Experian and Equifax. There may be a cost to freeze (or thaw) your file, but it’s minimal, especially when compared to the monthly cost of credit monitoring.
A potential downside to freezing your credit is that you won’t be able to sign up for that store credit card at the mall, but I view this as a benefit. It keeps you from adding to your pile of plastic.
The federal government’s Home Affordable Refinancing Program, or HARP, has been modified so homeowners who qualify can refinance their mortgages, even if they owe more than their home’s appraised value.
It’s too early to tell how homeowner-friendly the program is, but it looks like the government has it right this time. It seems like there is finally some relief available for homeowners who are current, but underwater, on their mortgage.
A key variable in qualifying for HARP is the mortgage has to be owned or guaranteed by either Fannie Mae or Freddie Mac.
In filling out the paperwork before having outpatient surgery, I was asked if I had a valid will and a health care directive in place. I did, but a relative in a similar position did not and had to scramble to complete them. People tend to be squeamish about their mortality and avoid this planning.
A health care directive lets you call the shots concerning medical treatments at the end of life. This can include a medical power of attorney that lets you appoint a health care agent authorized to make medical decisions for you if you cannot make them for yourself. A will directs the disposition of your estate to your heirs. Dying without a valid will is called dying intestate, and when you die intestate, the state determines the disposition of your assets.