Saturday, February 19, 2011

10 steps to a brighter financial future

The annual income-tax filing ritual entails more than just calculating your tax liability. It's also an opportunity to step back and assess your broader financial picture on a set schedule each year.

Although solid planning goes well beyond tax issues, a careful check of your personal data for the past year provides a starting point to see whether you're heading in the right direction.

Here are some tips to evaluate your situation with the aim of improving things over the course of 2011:

1. Know where you stand.

Take your financial pulse by examining your cash flow and net worth.

Track income and expenses by compiling a monthly budget. Then list assets against debts to determine your net worth.

Income-tax returns don't provide a full picture of where you've been spending money, because not all expenses are deductible. But they can help show your income trend and highlight some large expenditures.

2. Look for tax savings.

It's mostly too late to make changes that can help shave your tax liability for 2010. But it's a good time to start planning strategies for the future.

Gale Northrop, a Charles Schwab branch manager in Peoria, suggests putting money in tax-sheltered retirement accounts as early in the year as possible.

In fact, you still might be able to invest in an Individual Retirement Account and take a deduction for 2010, as IRAs offer one of the last remaining tax-saving tips for the current season.

Now's also a good time to ponder tax withholding. If you usually get a big refund, consider withholding a bit less so you have access to the cash earlier.

"Having access to the money throughout the year allows you to budget better," said Ericka Young, a financial coach at Tailor-Made Budgets in Gilbert. She says that big refunds also represent interest-free loans you're making to Uncle Sam.

3. Check your credit.

Are your debts listed accurately and have you been paying bills on time?

Track your progress by examining your credit reports, which include your payment history, debts incurred and other issues, such as bankruptcies and legal judgments, if any.

You can order a free report each year from each of the three credit-reporting bureaus through

It's important to keep an eye on your reports because the information contained in them will affect your credit scores.

4. Improve your creditworthiness.

If you don't have a solid credit history, you'll have problems securing loans on good terms. You also might find it tougher to rent an apartment, obtain insurance or even land a job, because banks aren't the only parties that might check your credit records.

The most direct indicator of good credit behavior involves simply paying bills when due and cutting debt over time.

"Reduce your credit-card debt by making above-the-minimum payments on your highest (interest) credit card first," said Cynthia Fick of Financial Life Planners, an investment-advisory firm in Ahwatukee Foothills.

After that, she suggests striving to pay off the card carrying the next highest interest rate while continuing to pay at least the minimums on all others.

5. Build up savings.

With the economy so unsteady, it's smart to have a reserve to cover emergencies or even living costs if you lose your job.

Advisers used to recommend compiling enough cash to cover at least three months of living expenses. But many now suggest a bigger cushion because it can take much longer to find employment today.

Young suggests a cash reserve equal to six months of expenses.

"That's more achievable than 12 months, yet it still might take that long to find the job you want."

With your rainy-day fund in place, you can turn to longer-term saving and investing goals.

Fick suggests that you watch spending and create money rules in conjunction with your spouse or significant other.

"For example, agree that neither one of you will spend over $400 without discussing it with the other first," she said.

6. Boost retirement contributions.

If you invest in retirement accounts such as IRAs and 401(k) plans, you don't pay taxes on earnings until you withdraw the funds. That means you can benefit from decades of tax-sheltered growth.

But tax deferral is just one reason to sock away money in retirement accounts. You also likely will receive employer-matching funds in the case of 401(k) accounts. Plus, you can reduce your taxable income by some, if not all, of the money you contribute to retirement accounts.

In a recent study of women earning $75,000 or more in annual income, the MetLife Mature Market Institute found that nearly 2 out of 3 wonder whether they'll have enough money to retire, and nearly half worry that they'll outlive their assets.

7. Invest more aggressively.

Many people currently are shell-shocked from past stock-market losses, and studies have shown women to be more cautious investors than men. This isn't necessarily good, since women must build up more assets in preparation for retirement and other demands.

If you won't need to tap your account for many years, lean toward broadly diversified stock mutual funds, exchange-traded funds or other growth assets in a diversified portfolio.

"Invest wisely by having lots of different eggs in lots of different baskets," Fick suggests.

"If you're too conservative, mainly by sticking with bonds and certificates of deposit, you give up so much potential upside," Northrop said.

8. Go electronic.

The Internet has made it easier to conduct routine business. Look to deposit paychecks automatically and sign up for automatic bill paying. You'll reduce the chance of theft, save postage costs and perhaps avoid late-payment fees.

While you're at it, sign up for electronic alerts that can notify you of unauthorized activity in your bank, credit-card or investment accounts.

9. Cover your assets.

Everyone should prepare for the unexpected. In the insurance area, this includes car, health, disability and homeowners (or renters) coverage.

Another type of insurance that may prove particularly helpful, especially for women, is long-term-care coverage, which pays for nursing-home, assisted-living and other types of care. Because women tend to live longer than men, they stand a greater chance of needing such benefits.

10. Add other protections.

Then there's estate planning. If you have children, a will is essential for naming a guardian to care for them in your absence.

Another handy document is the financial power of attorney, which lets you to name someone to make money decisions on your behalf if you're alive but incapacitated. The health-care power of attorney allows the same with medical decisions.

Taking it a step further, you might consider setting up a living trust. Among other benefits, trusts let you leave assets to family members or friends in exactly the manner you wish, without subjecting them to the time, hassles or costs of probate-court involvement.

These and other documents should be reviewed periodically, with beneficiaries listed properly.

"You should update them any time you have a major life change such as a birth, death, divorce, marriage or child turning into an adult," said Susan Faris, founder of the Estate Plan Store in Phoenix.

You should also make sure the documents can be located easily in a pinch.

by Russ Wiles The Arizona Republic Feb. 19, 2011 12:00 AM

10 steps to a brighter financial future

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