smart spending
9 smart personal finance moves in 2009

This is my ninth year of writing a New Year's column that suggests steps readers can take to improve their finances in the coming year. The theme this year is "keeping you in the know." Here's hoping you have a safe and prosperous new year and that you'll stay in the know.

1. Know yourself. The financial planning field has largely embraced helping people identify their life goals while mapping out a path to achieving those life goals. It makes sense. Money can be the means to an end, or a way to keep score. But it makes a lousy proxy for measuring what you're getting out of living your life.

What do you want to accomplish while on this Earth? What do you need to get it done? Revise, re-evaluate and resubmit as necessary, but don't let the pursuit of wealth be the goal. Instead, let it be a catalyst to achieving your goals.

The Bankrate Financial Literacy series on financial tuneups article "Use investments to reach your goals" can help you get started.

2. Know where the money goes.  You can do one of two things with income: spend it now or save it for later. Consistently spending more than you make keeps you from putting anything toward future goals. Put together a spending plan for your income and try to stick to that plan. Paying off credit cards and staying current on bills is a good first step.

I call it a "spending plan" rather than a "budget," because budgeting -- like dieting -- is a chore. On the other hand, a spending plan puts a more positive spin on how you choose to allocate your income. Bankrate's "Home Budget Calculator" will help you structure a spending plan.

3. Know when to say no.  Growing up, my mother always had me make the distinction between a need and a want. It's stuck with me over the years. Being able to focus on what you need, versus what you want, can make the difference in reining in spending.

While I've never been a member of the "lose the latte" school of financial planning, paying 18 percent on a credit card balance to finance that latte habit means you can't afford it. Personally, I go for a rainforest espresso made in my trusty Keurig machine. It costs about 50 cents a cup.

Once you know where the money goes, do a little triage and work on reducing your monthly nut. Cutting back on cable, losing the land line, dining out less and packing lunch can help free up funds in your monthly spending plan.

4. Know when to say yes.  Being able to differentiate between a need and a want doesn't mean you should ignore the wants. Instead, just hold them in abeyance until you get the needs met.

A little spontaneous consumption is good for the soul. There's more to life than bills and work. Put together a list of things you've always wanted to do. Then, do one or two of the legal ones and see how you feel.

5. Know when and who to ask for help.  It doesn't take much of a household emergency to get me to hire professional help. I'm not going to fix my water heater, furnace or car. It's best left to the professionals. Doing so saves me time, frustration and (quite often) money.

Hiring a professional also makes sense when it comes to financial planning.

Financial planning is a lot more than just managing investments. A comprehensive financial plan looks at the big picture. It includes a review of insurance, employee benefits, income taxes, investments, retirement and estate planning. Sound financial planning also examines personal financial statements, measures client attitudes toward risk and develops client goals.

A good planner is the coxswain of your financial ship, controlling the rudder and making sure all the other professionals have synchronized their strokes and are pulling you in the same direction toward your goals.

The Bankrate feature "Financial planners: not just for millionaires anymore" provides a nice overview in how to select a planner. Bankrate's "Search for a Certified Financial Planner" will help you find a CFP professional in your area. Try to choose a fee-only adviser.

6. Know your risk tolerance.  How do you really feel about risk in investing?

In 2008, a lot of stock market investors learned the hard way that they didn't have the stomach for sitting tight through a bear market. The stock market (as measured by the Dow Jones Industrial Average) lost 47 percent of its value from the all-time high Oct. 9, 2007, to the recent low Nov. 20, 2008.

If you find yourself tossing and turning at night -- and it's not the mattress, but rather the markets keeping you awake -- it's time to dial down the risk level of your portfolio.

The "Investment Risk Tolerance Quiz" offered by Rutgers New Jersey Agricultural Experiment Station can give you a quick read on your risk tolerance. Bankrate also has a risk-tolerance quiz.

Knowing your risk tolerance will help you decide how to invest. Conservative investors may not be comfortable investing much money in the stock market because of its volatility. Lower volatility means lower potential returns, so a conservative investor may have to save a higher percentage of income to be on track to meet financial goals.

Investors have to manage investments considering twin risks -- the risk that the investments lose principal and the risk that the investments lose purchasing power.

Conservative investors can protect principal by investing in FDIC-insured certificates of deposit, or CDs. However, the FDIC doesn't protect the purchasing power of those deposits from the ravages of inflation. Keep an eye on purchasing power, too.

7. Know your portfolio.  Take a holistic approach to your savings and investments. A large emergency fund held in money market mutual funds or cash investments will lessen your need to hold short-term investments in other investment accounts.

The downdraft in the stock market makes it a good time to review and rebalance your portfolio. While no one can predict the future, deciding on an asset allocation strategy and periodically rebalancing to that strategy are important parts of investment management. Bankrate's "Asset allocation calculator" offers a starting point for considering asset allocation.

If you don't do it already, take a stab at reading a prospectus or two from the mutual funds you own. You'll have a much better sense of what the investment manager is trying to achieve, a better handle on the fees and expenses associated with the investment, and a better sense of whether the investment is right for you.

8. Know your mortgage.  The U.S. government's bailout programs have finally trickled down to consumers. The goal is to get banks lending again, and lending to consumers has become part of the focus.

The government is looking to jumpstart borrowings in everything from car loans to student loans to mortgage loans. It's also created an opportunity for homeowners to refinance their mortgages, as rates fell bellow 6 percent in late November after the Federal Reserve's announcement that it would buy up to $500 billion of securitized loans.

The interest rate on a 30-year fixed-rate mortgage is priced off the yield on the 10-year Treasury note. At this writing, that yield is 2.92 percent, within 0.02 percent of the lowest yield recorded by the Federal Reserve since it began tracking this on a daily basis in 1962.

What's all this have to do with your mortgage? If you're in an adjustable-rate mortgage, or ARM or a hybrid mortgage, like a 5/1 ARM, it could be a good time to refinance and lock in to a low 30-year fixed-rate loan.

If you're upside down in your loan (meaning you owe more than the house is worth) it's still a good idea to know your mortgage terms. The Federal Reserve has lowered its targeted federal funds rate significantly in recent months. That rate influences other short-term interest rates and should make adjustable-rate mortgages more affordable, at least over the short-term.

Knowing where you stand with your mortgage also helps in determining whether you qualify for one of the mortgage-assistance programs, from the FHA's "Hope for Homeowners" to the Federal Housing Finance Agency's streamlined modification program.

9. Know your credit.  It's always been important for consumers to have their fingers on the pulse of their credit. It's doubly true this year, as lenders looking to tighten lending standards want loan applicants to have top-notch credit. Also, don't give existing lenders an excuse to raise the interest rates on your credit cards.

Get free credit reports from AnnualCreditReport.com. Because most of us can only get one free credit report each year from the consumer reporting agencies, or CRAs, I suggest spreading out the reports from the big three CRAs (Equifax, Experian, and TransUnion) over the year. That way, you review a credit report every four months for free.

The reports won't all be the same, because lenders aren't obligated to report your payment history to all three CRAs. But they should be similar enough for monitoring purposes.

If you suspect fraudulent activity, consider freezing your credit as a way to protect yourself against identity theft. Sure it's a bit of a nuisance, but keeping others from accessing your credit is worth the inconvenience.

The Bankrate feature, "Credit freezes available nationwide" explains it all in greater detail.

Bonus! Be part of your community

Everyone wants to live in a great community. However, it's people, not houses, that make a community great. Be a better person, and you get a better community. Volunteer your time and get involved in your community. You'll make a difference and feel great doing it.

 

 

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