All Things Financial Planning Blog

While it isn’t quite New Year’s just yet, we are getting close. So this month I thought I’d share some thoughts regarding that most popular tradition — New Year’s Resolutions. Only these are resolutions of the financial kind.

The very first resolution on your list for the coming New Year should be to get a written financial plan or if you already have one have it updated. No one can be successful in life or any endeavor without a plan. Experts tell us that plans don’t get implemented unless they are written down. So if you have a financial planner, great, call her or him and tell them you want to update your financial situation and get a written financial plan or update your current plan.

If you don’t have a financial planner, visit FPA’s Planner Search site and seek out a financial planner who provides written plans. There are planners who work on an hourly basis, flat fee or do the plan as a percentage of assets they would manage for you. Rest assured a written financial plan is affordable and you can find a planner to fit your budget.

Make sure your plan includes “paying yourself first.” Items that we should plan and put money away for are things like vacations, retirement, college funds, emergencies, opportunities, a new house or car and general savings. Between your retirement and general savings, including emergency situations, you should try to save at least 15 percent of your paycheck every month. If that is not affordable, then prioritize issues and save as much as you can, but pay yourself first, just like it were any other bill.

If you have a 401(k) at work, be sure you try and have deductions from your pay check at least to your employers match. Let’s say your employer matches $0.50 on the dollar up to 6 percent of pay. That is an extra 3 percent that gets invested on your behalf each year and goes toward that 15 percent goal I mentioned above.

Speaking of retirement issues, the first of the year is a great time to look at your 401(k) and other retirement funds and adjust any asset allocations that you have. The markets never all go up or down at the same pace so your investments tend to get a little too aggressive from your winners or a little too passive from those decliners. If you are working with a financial planner they will do this for you. If you are on your own, visit Web sites from mutual fund companies, banks, and other financial providers. They almost always have online calculators and information regarding how to set up your investment accounts.

If you have any type of traditional Individual Retirement Account (IRA) and no matter what your age you should have someone assist you in deciding whether to convert those traditional IRAs to a Roth IRA. 2010 is a year when many of the restrictions come off Roth conversions and since there are many moving parts, this is one you shouldn’t do alone. It is well worth it to pay a financial planner to do the calculations for you to see if it is worth you converting a tax deferred IRA to a tax free Roth IRA. Taxes will have to be paid on the conversion and that is where a lot of the challenges come in to play. And do it early in the year!

The first of the year is a good time to review all of your insurance policies. Your homeowner’s and auto for proper deductibles, coverage and liability protection, should be reviewed. Life, health, disability and long-term care policies should be explored for needs, amounts, types, premiums and proper beneficiary designations.

If you have some extra dollars floating around you may want to consider making an extra mortgage payment in January. If you have a mortgage that allows you to pay it down early, the extra or “13^th month” payment is all applied to principle which takes payments off the back end. You can turn that 30-year mortgage into a 25-year or less just by making extra payments, either one time or each month throughout the year.

And speaking of mortgages, if you haven’t looked into refinancing your existing mortgage yet, do so now. Rates are at historical lows and unless your mortgage is a jumbo mortgage, there are good opportunities to reduce your rate to below 5 percent.

One last item for our resolutions list — your emergency/opportunity fund. I have seen too many people who have lost their job over the last 18 months who did not have adequate savings to pay bills and buy food while they search for new employment. As financial planners we know clients should have at least three to six months of monthly bills set aside for emergencies like an illness or job loss. This recession has changed my direction on this subject. I have instructed those I work with to build up that fund to a minimum of one year’s worth of normal bills. It is a great comfort to know you have that kind of a cushion.

I hope you take advantage of this opportunity to do your financial New Year’s resolutions. Happy Holidays and a financially successful New Year to you all!

Jim Barnash, CFP®
Senior Partner
Stride Consulting, Inc.
Chicago, IL