Category: Planning


Financial Goals for 2010

Filed Under: Planning, Saving & Investing, Taxes
Dec.31, 2009

Now is the time to outline your financial goals for 2010. In case you haven’t already done this, I’ve put together some ideas to get you started. While I’ve loosely prioritized the main themes, you’ll want to tailor things according to your individual situation.

Reduce your debt

Debt reduction should, in my opinion, always be numero uno. This is especially true if you’re dealing with high interest consumer debt. But even if your debt has a low interest rate, you might still want to make debt reduction a high priority. Whether or not you should pay off your mortgage early is a hotly debated topic, but even that is worth considering.

Build your savings

Your first line of defense when it comes to your finances is your emergency fund. Open a high yield savings account and work to build it up as a hedge against job loss or other unexpected curveballs that you might come your way.

A lot of people say to maintain a minimal emergency fund until you are out of debt, but I disagree. I think you should always pay yourself at least a small amount. That’s why I stick to a 75/25 savings plan.

There are, of course, other savings priorities that you might need to consider. For example, if you have a high-deductible health plan, you should be funding a Health Savings Account (HSA) so you can pay for health expenses with pre-tax dollars. Unlike a Flexible Spending Account (FSA), you can modify your HSA contribution levels throughout the year.

Fund your retirement

When it comes to funding your retirement, you have several options.

Individual Retirements Accounts – These come in two main flavors: Roth and Traditional. I personally prefer Roth IRAs over Traditional IRAs, but your needs may be different. Regardless of the type you choose, funding your retirement is an important priority. If you are under 50 years old, the 2010 IRA contribution limits are $5,000 or 100% of your taxable compensation, whichever is less.

If you are 50 or older and have sufficient taxable compensation, you can contribute $6,000 in 2010. The extra $1000 is referred to as a “catchup” contribution. Either way, getting started in January is your best bet for fully funding your IRAs. In fact, you still have time to make your 2009 contributions if you haven’t done so yet — the deadline is April 15, 2010.

Employer plans – Depending on where you work, you might have access to a 401(k), 403(b), and/or 457(b) retirement plan. We’ve previously outlined the contribution limits for these plans. In short, you can make elective deferrals of $16,500 to these plans in 2010 with an additional $5500 in “catchup” contributions if you’re 50 or older. If your employer matches your contributions, you should at least take advantage of the match so you’re not leaving money on the table.

Taxable investments – If you’re doing all of the above and still have money to spare, you should consider investing in a taxable account. You can do this either through a major mutual fund family, or through a discount broker. Either way, you’ll want to pay attention to tax efficiency when deciding what to hold where.

Save for college

Once you have everything else under control, you might be interested in funding your child’s education. Here are some of the best ways to do so…

529 Plans – When it comes to 529 plans, you have your choice between prepaid tuition plans and college savings plans. The former is a hedge against tuition inflation, while the latter depends on the performance of the underlying funds.

Regardless of which route you choose, make sure you do your homework. The good news is that qualified distributions are state an federal tax free (at least for now), and you might also get a state income tax deduction on your contributions.

Education Savings Accounts – The “Education Savings Account” (ESA) is a less-utilized college savings vehicle that has undergone some attractive changes since its inception as the “Education IRA.” Like a 529 plan, qualified distributions from an ESA are tax free.

ESAs can be used not only for qualified college expenses, but for certain K-12 expenses, as well. The contribution limits were raised from $500 to $2,000 in 2002 and remain there today. If you’re in a position to fund your child’s education accounts, make sure you look into this as an option.

What are your financial goals for 2010?

As I noted above, everyone’s financial priorities are likely to differ at least a little bit. While the above outline is a good place to start, you’ll want to tailor things for your own needs. You might even have things on your radar that I haven’t touched on.

What are your financial goals for the coming year?

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Reactive vs. Proactive Finances

Filed Under: Planning, Saving & Investing
Dec.29, 2009

This is a guest post from Darwin of Darwin’s Finance. If you like what you see here, please consider subscribing to his RSS Feed.

In life, we’re routinely faced with situations that require an immediate reaction. Consider the need to pay monthly bills and keep your head above water. Beyond these short-term reactions lie proactive decisions that provide longer-term benefits.

For example, paying yourself first with just $50 extra per month to go directly into an IRA, 401(k), or other account is a proactive step that will lead to a better retirement. While such thinking results in obvious benefits, however, it typically requires delayed gratification.

With budgets becoming increasingly tight for Americans, being proactive in just a few facets of your financial decision-making can provide you with enormous benefits and set yourself up for long-term financial success.

I’ve highlighted below a few situations in which it pays to be proactive rather than reactive. If you find yourself constantly reacting to financial situations, you may want to ask yourself why, and whether it’s time to get a little more proactive.

Emergency savings

Having an emergency fund prevents painful emergency fees, payday loans, credit card interest payments, and other non-essential payments that you wouldn’t otherwise incur. Nobody sets out in life saying, “I’m looking to pay exorbitant fees on debt for the rest of my life,” but that’s the situation many people find themselves in without proper planning.

Life happens, and the repercussions of living without a safety net can last for years. You risk bankruptcy or foreclosure, or at least being forced to sell off personal assets at a loss to make ends meet.

If nothing else, having cash to fall back on will help you sleep better at night and should outweigh the perceived benefits of owning a high-end car or the latest HDTV technology. If you don’t have an emergency fund, think about what it would take to build one. The near-term sacrifices will be worth it in the long-term.

Budgeting

Living paycheck-to-paycheck carries thousands of dollars per year in hidden costs. Without sufficient cash on hand, you lose out on things like early payment discounts on taxes, insurance, etc. You’ll also wind up facing unnecessary overdraft fees when your accounting is off by as little as $1. Beyond this, you’ll be unable to take advantage of one-time opportunities where having cash on hand can save you money (see below). If you can’t stand budgeting, at least consider implementing a reverse budget to avoid these problems.

One-time events

Americans have been presented with numerous one-time opportunities to exploit situations created by the financial crisis, but only those with liquid cash and/or good credit have been able to take advantage of them. Examples abound, including the homebuyer tax credit, cash for clunkers, and the opportunity to buy into the stock market when investor capitulation sent shares down by as much as 50% (70% for Emerging Markets).

An upcoming opportunity is the cash for appliances program, which is being rolled out state-by-state. This program will allow you to replace your aging appliances with a more energy efficient model at a substantial discount. You will also realized the long-term benefit of decreased energy costs.

Perhaps your existing appliance are already reaching the end of their useful life. If you combine the government’s incentive program with adequate cash on hand and a bit of research, you can realize a very strong return on your investment in 2010.

Paying for convenience

People sometimes take the easy route instead of the smart route at the expense of a few dollars here, a few dollars there. This translates into hundreds, if not thousands of dollars per year in leakage from your after-tax budget. A simple example involves buying food and drinks at the movie theater instead of taking them with you.

Here’s another example: I went to a Borders and browsed the store for books for my wife last week. I found several that I knew she’d love, but instead of just buying the books on the spot, I whipped out my iPhone and checked out the prices at Amazon. Even with the in-store “discounts” and club card, the savings at Amazon were over 30%. By planning ahead and allowing time for shipping, I saved a quick $30 on Christmas and personal book purchases.

Finally, we shop at Costco several times per year and buy in bulk instead of paying significantly more per unit at a grocery store. While shopping at Costco takes a bit more planning, and the up-front costs are higher, we save a ton of money. Surely, you encounter these sorts of situations daily. Each time you’re making a purchase, think about whether you could’ve done better with a bit of advance planning.

High ROI expenditures

Seeking out a high return-on-investment (ROI) is a smart way to improve your bottom line. There are some very simple and inexpensive ways to reduce utility expenses at home that many people don’t consider. For example, while buying conventional light bulbs is cheaper than CFL bulbs, there’s no question that you save money with CFL bulbs over the long term. Other examples include reducing your utility costs by switching to a low-flow shower head, planting shade trees around your house, and investing in an energy audit for your home.

Investment strategies

Reacting to market news by altering your investment strategies has wreaked havoc on retirement funds of millions of Americans. While Western society has hundreds of years of historical market data indicating that over long periods of time, equities outperform bonds and cash, millions of investors sold out of stocks last winter/spring, effectively locking in their losses.

They just couldn’t take the continued declines and bad news. Unfortunately, those individuals that reacted to recent market performance and deviated from a long-term investment strategy missed out on a huge rally. In contrast, investors that stayed the course are now seeing their 401(k) balances at or above the pre-crash levels (Vanguard notes that 60% of 401(k) accounts now have more money in their accounts than prior to the start of the crash).

While cynics will point out that monthly investments and company matches continued along the way, the point is that by sticking to the same long term strategy, these 60% are in pretty good shape compared to those who panicked and reacted to poor market performance by jumping ship.

No responsible investment adviser would advocate 0% equities in a retirement account with a 20+ year time horizon, but I have colleagues and friends in their 30s who completely sold out of stocks earlier this year and said they’re never coming back. Their investment portfolios will almost certainly lag behind inflation, meaning their money will be shrinking.

Closing thoughts

As you can see, there are many situations in which we’ll be forced to react if we haven’t gone to the trouble of planning for the future. Yes, being proactive and planning ahead requires short-term sacrifices, but the long-term benefits make it all worthwhile.

Do you have additional examples of being proactive vs. reactive in your financial life? If so, please share them in the comments.

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