No one can predict with any great certainty the financial outlook for 2016, especially with the national elections looming in November. Nevertheless, certain money management strategies make sense every year.
After an essentially flat market last year, what should physicians focus on in 2016?
Joel M. Blau, CFP
With another year behind us, it’s time to plan proactively for your future financial health. No one can predict with any great certainty the financial outlook for 2016, especially with the national elections looming in November. Nevertheless, certain money management strategies make sense every year.
Debt reduction. Although some forms of debt, such as the mortgage on a house, may be perfectly acceptable due to the tax deductibility of the interest, you should do your best to reduce your other debt load, especially if you are paying interest at relatively high rates. In some cases, debt consolidation may be advisable.
Budgeting. Spending more than you make is a common problem. It’s helpful to draw up a monthly budget that takes all your expenses into account. Give yourself a little leeway but stick close to the guidelines you’ve created throughout 2016.
Emergency funds. The old axiom about saving for a rainy day is true. See if it’s possible to increase savings out of the monthly budget even if you do not think it is critical. A sudden job loss, major surprise expense, or unexpected health issue can change things quickly. The general rule of thumb is to maintain an emergency fund equal to three to six times your monthly living expenses.
Ronald J. Paprocki, JD, CFP, CHBCTax efficiency. As you reach higher tax brackets due to your earned income, you’ll need to place a greater emphasis on being tax efficient. Factor the tax ramifications into your investment returns for non-qualified accounts. Remember to analyze your returns on an after-tax basis, since it’s what you keep after taxes, not how much you earn pre-tax, that really matters.
Diversification. If volatility in the stock market has taught us anything, it is the importance of diversification. Diversification means spreading your investments over different asset classes, as well as investing within those classes. Conversely, if your investment focus is extremely narrow, the risk of a disaster is greater due to the lack of diversification.
NEXT: Asset allocation, portfilio rebalancing retirement and more
Asset allocation. This investment principle often works hand in hand with diversification. By assigning various percentages to the assets in your portfolio, based on your risk tolerance and return objectives, you increase the likelihood of meeting your investment goals. In addition, asset allocation modeling allows you to address risk parameters within your overall portfolio.
Portfolio rebalancing. Even the best investment design can become out of balance relative to the asset allocation goal over time. Your portfolio is a moving target that you must keep an eye on. For instance, if you have adopted an asset allocation plan, now is a good time to review it and make the necessary adjustments. This should be done on an ongoing basis, either quarterly or annually, depending on your situation.
Retirement plan contributions. If you already contribute to an employer plan such as a 401(k), keep it going. In fact, where you can afford to, you might increase contributions for 2016. The money in your account continues to grow on a tax-deferred basis until it is withdrawn-usually, not until you retire. If you own your own practice, determine whether you are utilizing the best type of retirement plan for your specific situation.
Traditional and Roth individual retirement accounts. Qualified plan contributions may be supplemented by traditional and Roth IRAs. Because Roths offer future tax advantages, you may choose to convert IRA funds into a Roth this year and pay the resulting tax. If you converted in 2015 and want to undo it, you have until Oct. 17, 2016, to do so.
Estate planning. Finally, look forward into the future. Fine-tune your estate plan with your estate attorney by addressing the changing needs of your family. When possible, maximize the benefits for your heirs with a minimum of tax erosion.
What exactly is the probate process?
Probate is the court proceeding in which the executor named in the last will and testament petitions the court to declare the document as valid and allows the executor to collect and distribute assets according to the terms set out in the will.
This process can be very time consuming. If an estate winds up in probate, many months or even years may pass before the assets are fully dispersed. In addition, the court can place restrictions on how the executor can distribute assets. For example, if the estate contains real property, such as a home, the executor may have to obtain court permission to sell it.
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Questions of general interest will be chosen for publication. The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice.