The beginning of a new year is always a good time to reassess our finances and, if appropriate, make adjustments. Here’s a brief outline to guide you through the process.
Spending – Think of your household as a micro-economy of its own. Income comes in – expenses go out. Most of us have a desire for more income, but little control over it. On the other hand, we have total control over our spending, but little motivation to do so.
Assume you just found out that your pay was being cut by 10%. Where are you going to find 10% in your expense budget to make up the difference?
If your household income is $80,000, that’s $8,000 you need to find, or $750/month. Sound impossible? It’s not – and even if you don’t get all the way there, chances are you’ll be able to increase your saving rate by several thousand dollars a year.
Debt – What debts do you have – credit cards? A mortgage? A Car Payment (or two)? Student loans? Dave Ramsey has an excellent way to attack debt – and it’s easy to do.
You just went through your monthly budget in step one. Let’s say you found just $200 a month you could eliminate from spending, and you have $2,000 of credit card debt (with a minimum monthly payment of $80), and an $8,000 car loan (with a $350 monthly payment).
Ramsey says put the extra $200/month toward the (smaller) credit card debt. In 10 months, your extra $200/month will wipe it out. By then your regular car payment has reduced that loan balance to $5,000. Now – take the $80 you were paying on the credit card, plus the $200 extra you were putting against it, and put both amounts ($280/month) toward the car loan. Believe me – they’ll take the money – and you’ll discover that in less than a year, the car loan will be gone too.
Now, take the $280, plus the $350 you don’t have to pay on the car loan anymore, and put an extra $630 toward another debt if you have one – or into extra savings if you don’t. Easy.
Taxes – Taxes are astronomically high and going higher. So what are you doing to adjust? Here are some suggestions. First of all, dump the notion that a tax refund is a good thing. It’s an interest free loan to the government. So adjust your W-9 through your employer so that you don’t get a tax refund, but get extra money in your paycheck instead (might help you with issue 2 – Debt).
Next, what are you putting into the company 401k? 100% of that money will be taxed at unknown future tax rates, and will also likely trigger taxation of your social security benefits. So consider instead a high quality cash-value life insurance policy.
You can take money out tax-free in many cases, and that money won’t trigger taxation of your Social Security benefits. Those two features alone far outweigh the benefits of tax-deferral and even company matching funds.
Insurance – Speaking of insurance, review your various insurance coverages. Shop your home and auto insurance every 3 years.
Do you have adequate life insurance – and the right kind? Have you shopped your life insurance in the last 5 years? Do you know that life insurance gets cheaper over time?
What about ‘longevity’ insurance – meaning income sources that you can’t outlive. Do you have at least part of your money in high quality annuities that guarantee lifetime income?
And what about long-term care coverage? Three- fourths of us will need it – and the average annual cost is $60,000 and growing. What will you do? Traditional long term care insurance is a ‘use-it-or-lose-it’ proposition – and that’s if you can get it and afford it.
Fortunately, many kinds of life insurance (and some annuities) have ‘free’ riders that will protect you in these events – which is another good reason to look up your insurance agent and ask about what’s new.
A few hours of attention to these four basics of your financial life could make 2016 a breakthrough year for you. Isn’t it worth your time to slow down and consider a financial reset at your house?