The end of the year is a great time to assess and—in many cases—reassess your life goals and make resolutions for the new year. That’s also true when it comes to your financial goals, especially if 2012 wasn’t too kind to your bank account.
The good news is that it’s never too late to regroup and bounce back. Financial success requires long-term planning, discipline and expert advice. While some of us may earn enough to live a relatively comfortable life, there are far too many of us living paycheck to paycheck. It’s important for all of us, whether we are married, divorced, single, caring for aging parents or trying to send kids to college, to understand our own unique position, life factors and future financial aspirations. It is also important to consult with a financial, legal or tax professional to help develop a personalized and comprehensive road map for you and your family.
Although there is nothing certain about the outcomes you will achieve through saving and investing, one thing is definite: When you’re prepared on both offense (wealth accumulation) and defense (risk protection), you can achieve financial security.
SMART MONEY MOVES
Here are 13 tips to help you make savvy career moves and investments, save for major expenditures and manage your tax liability in the new year:
Take Advantage of FREE Money
1. Maximize Your Contributions
Contribute as much as you can to your 401(k) and definitely contribute enough to take advantage of any matching employer contributions. If you don’t have access to a plan at work, consider an Individual Retirement Account (IRA) or other vehicle. According to a 2010 survey by the U.S. Department of Labor, 30 percent of private industry workers with access to a defined contribution plan, such as a 401(k), did not participate.
2. Compounding: The 8th Wonder of the World
Compounding is the ability of an asset to generate earnings, which are then reinvested to generate their own earnings. Let’s say you invest $10,000 in a tax-deferred account, such as a 401(k), and over 30 years you earn an average annual return of 7 percent. After the first year, your account would be worth $10,700; after 30 years, $76,123, more than seven times your original investment without any additional contributions!
3. Build an Emergency Fund
Aim to set aside at least six-to-nine months of living expenses in a savings or money market account for unplanned expenses. When the unexpected happens, having a strong emergency fund will make all the difference and prevent you from tapping into longer-term savings vehicles with stiff early-withdrawal penalties, such as 401(k) plans.
4. Save Early for Child’s College
Starting early is key. Sock away $250 a month from the time your child is born, and you could have around $120,000 by the time he or she is ready for college, assuming 8-percent average annual returns. But if you wait just five years to start, you’ll need to cough up approximately $440 a month to get a similar result.
5. Consider converting a traditional IRA to a Roth IRA
Taxes on the amount converted are generally due in the year of the conversion; however, after that, investment earnings compound tax-free and can be distributed tax-free during retirement.
6. Take advantage of Tax Opportunities
If you consider selling appreciated stock in 2012, you may be able to take advantage of the 15-percent long-term capital gains rate. You may also avoid the 3.8-percent Medicare surtax that is slated to become effective in 2013. Check with your tax advisor.
7. Reassess Tax- Deferred Savings
The rationale for investing in tax-deferred retirement funds is that when you retire, your tax rate will decrease because you’re not earning a salary. Tax deferral may not work that way in the current environment. Today’s tax rates are historically low but could easily increase with looming issues such as the federal deficit, Social Security and Medicare. If rates increase, having all your retirement savings in tax-deferred traditional IRAs or 401(k) plans could mean you’ll pay more in taxes when those funds are distributed. Check with your tax advisor.
8. Break Down Your Career into Manageable Segments
Always have a career plan and refer to it often. Ask yourself, ‘What am I going to do this year, this month and this day to enhance my value as a professional?’
9. If Stagnant, Consider a Career Change
Be aware of mobility opportunities or lack thereof. If you’ve reached the ceiling in your current career, it might be time for a change. Beware of looming layoffs within your organization; it’s easier to find a new job while you have a job.
10. Socialize, Socialize, Socialize
Be active both online and in the real world. Many companies value referrals, and networking on professional sites such as LinkedIn can help you connect with potential employers, new clients or mentors. By translating these connections into real-world relationships, you can fortify associations that may prove invaluable in the future.
11. The 20/10 Rule
Generally speaking, your total non-mortgage debt shouldn’t equal more than 20 percent of your annual net take-home pay, and monthly payments shouldn’t be more than 10 percent of your net monthly pay.
12. The 28/36 Rule
Your total monthly housing expenses, including insurance and taxes, shouldn’t be more than 28 percent of your pre-tax pay. Combined with your other debts, it shouldn’t be more than 36 percent.