The New Year brings new opportunities and is a time to reevaluate and reassess. Start your new year off right with a resolution to improve your financial fitness. Here are some ideas to get you started on a healthy financial path. If you feel overwhelmed, chose just one or two to focus and commit yourself to over the year. Feeling ambitious? Make the commitment to evaluate each aspect of your finances to make important improvements. If your finances are joint with your partner, work through your resolutions together to get your finances in shape for 2011.
Review 2010 End of the Year Reports
One of the best ways to prepare for the future is to look at the past. Most credit card companies, banks and brokerage firms will send you consolidated end of the year reports of your annual activity. Information you receive for your tax return such as W-2s, can also be reviewed to analyze your previous year’s activity. Use these reports to evaluate and identify areas in your income or spending that you can improve for the upcoming year – from insurance coverage and direct deposits to savings and utilization of flex spending accounts.
Reexamine Your Asset Allocation
Not only has the world changed, but it is evolving right before our eyes. Interest rates are near historic lows. Government bonds and high-quality corporate bond prices are near highs, and investors should be wary of taking on long-term high-quality bond commitments in 2011. Also look outside our borders, particularly at countries like China and India where GDP growth is higher and the growing middle class is providing a stronger engine for growth.
Revisit your mix of assets as your asset allocation will greatly impact your volatility, risk and future returns. Precious metals and commodity investments will build diversification in your portfolio and may enhance your investment returns for the future.
Establish an Emergency Fund
Job loss, disability, unexpected expenses or volatility of income – these are just a few reasons everyone should have an established emergency fund in place. How much an individual needs to set aside depends on various factors including your own risk tolerance and expected future income. But for the most part, it’s safe to have an emergency fund of 3-6 months living expenses. If you currently fall short of this goal, make a pledge to build up a solid emergency fund early in 2011.
Vet Your Interest-Bearing Accounts
Now is the time to check the current interest rates on your idle cash balances. You may be shocked to find that your banks and interest bearing accounts are paying you almost nothing. If you are not getting the best interest rate available on your checking and savings accounts then try to negotiate with your current bank or consider shopping around for special rates on CDs, bonus offers for opening new accounts, and other value-added promotions.
With interest rates at historic lows, you may also want to reexamine your home mortgage or home equity line of credit. If you qualify for a loan, consider refinancing to take advantage of such savings. With reduced monthly mortgage payments, you can allocate the additional savings to other financial goals or reduce your debt faster.
Aggressively Reduce Credit Card Debt
Remember credit card debt provides no economic benefit for you or your family as there is no tax benefit to paying traditional credit card interest. Make a resolution to get aggressive with eliminating your credit card debt. Start by gathering and organizing all of your credit card statements. On a spreadsheet, list the card provider, phone number, balance, interest rate and minimum payment of each card. Begin by calling the card providers and trying to negotiate a lower interest rate. Do this with each card.
By reviewing your budget, determine how much you are able to devote to paying off your debt each month. Start by paying off the credit cards with the highest interest rates first, but don’t neglect making minimum and on-time payments on the other cards simultaneously. Avoid late fees and consider transferring some of your debt to lower interest rates cards if possible. Though it sounds obvious, when working to pay off your cards, don’t add to the debt through additional purchases. Finally, consider taking a home equity line of credit, if there is sufficient value in your home, to obtain a lower interest rate and possibly convert the interest paid into a tax deductible format.
Increase Your 401(k)/403b Contribution
Your 401(k)/403b could very well become the largest savings account of your entire life! The long-term value is immense. Your biggest ally is the time value of money compounding over a long period of time. If you’re not maxing out your retirement contributions, consider increasing the amount you contribute. For 2011, the maximum you may contribute to a 401(k)/403b is $16,500. And for those age 50 and older, as of December 31, 2010, you may also contribute a catch-up contribution of $5,500.
Whatever you decide, you should elect to contribute at a level sufficient to receive the maximum free money available from your employer in the matching contribution, if applicable.
If you’ve received a cost of living adjustment to your pay, a salary increase, or end of the year bonus, these can be easy ways to find the money to increase your contribution proportionally. Since most contributions are automatically deducted, once you increase your contribution rate it’s easy to set it and forget it. With the tax benefits associated with your contribution, you’ll hardly notice a difference in your take home pay, but your future will thank you.