Each January, my firm receives lots of calls from people who’ve resolved to get their financial house in order. Here are a few of the planning tips we offer to them.
Create a spending plan. Begin tracking your cash flows (income, savings, expenses). You can do this by hand. But we love it when people use financial software, like Quicken or Money, because it’s so easy to view the information in different ways. Once you’ve started tracking your cash flows, look for ways to boost income and savings and trim expenses. It’s easier than you think.
Calculate your net worth. Net worth is the bottom line. It equals all of your assets less all of your liabilities. If you calculate yours annually, as of Dec. 31, you can track your progress (or lack of it) toward important financial goals. Start now using your year-end bank, brokerage and other statements.
Quantify your financial goals. It’s hard to arrive at your destination if you don’t know where you’re going. Start quantifying your financial goals in terms of time and money. For example, you want to retire in 10 years at 66. If you live to 100, you’ll spend 34 years in retirement. Your desired retirement income is $70,000 per year, adjusted annually for 3 percent inflation. Once you know your destination, you can figure out how to get there.
Protect your financial plan. Everyone needs to protect their plan from major, unexpected events, such as the loss of a job or the premature death of a breadwinner. This means funding an emergency cash reserve, and buying major medical and other insurance, as needed. Depending on your situation, you may need disability or long-term care insurance, term or whole life insurance, and property and casualty insurance. Major expected events should be covered in your spending plan.
Boost your long-term savings. Maximize “pre-tax” contributions to retirement plans, such as 401(k) or 403(b) plans, and IRAs. In effect, you’ll be making part of the contribution out of your pocket, and Uncle Sam will be making part out of his. For example, if you’re in the 15 percent tax bracket and you contribute $10,000 to your 401(k), your out-of-pocket cost is $8,500, and $1,500 comes from income tax savings. If you’re lucky, your employer will match some (or all) of your contribution. Once you’ve maximized your retirement savings, save more.
Get your affairs in order. Your estate plan should include a will (or will substitutes), durable powers of attorney for property management and health care, and a medical directive. In the event of your death or disability, this will allow your person and property to be managed according to your wishes. If you don’t do it for yourself, do it for your family.