Getting your finances in order can be overwhelming; here are a few good places to start. Plus, find out if it’s too late to make an IRA contribution.
Q: My New Year’s resolution was to get my financial house in better order. Any tips on where I should start?
A: First, congratulations on making the important decision to get your financial house in order. New year, new you! There are money management strategies that make sense to review and/or implement every year. Here’s where we think you should start:
Set short- and long-term financial goals. Whether you want to be debt-free in 10 years or own a home in 5, you are more inclined to save if you have specific goals. Factor these goals into a budget and figure out where you can squeeze the extra money to make these goals realities.
Budget. Overspending is a common problem. It’s helpful to create a detailed monthly budget that takes all your expenses into account. Give yourself a little leeway but do your best to stick to your plan as closely as possible each and every month.
Reduce debt. Reduce your debt load, especially if you are paying interest at relatively high rates, such as those on credit cards. Some debt, such as the mortgage on a house, may be perfectly acceptable due to the tax deductibility of the interest, but overall, try and keep your debt level to a minimum.
Be tax efficient. The tax code could experience a major shakeup in 2017 and in subsequent years. Make sure you pay close attention to the changes. Being tax efficient is always important, and it may take some extra effort to stay educated on current rules.
Maintain an emergency fund. We have seen clients saved by their emergency funds numerous times. A sudden job loss, major surprise expense, or unexpected health issue can change your financial picture quickly. Try to increase savings out of the monthly budget even if you do not think it is critical. The general rule of thumb is to maintain an emergency fund equal to 3-6 times your monthly living expenses.
Diversify. Any new presidential administration brings uncertainty, which typically comes with market volatility. To combat volatility, it is important to be diversified in your investments. Diversification means spreading your investments across and within different asset classes. Without diversification you risk being caught in an asset class that severely underperforms your expected rate of return.
Use asset allocation. This investment principle often works hand in hand with diversification. Assign specific percentages to the investments in each asset class within your portfolio. The percentages you choose should be based on your risk tolerance and return objectives. The more aggressive you want your portfolio, the higher the percentage that should be invested in equity asset classes. The more conservative you want your portfolio, the higher the percentage that should be invested in fixed-income asset classes. If you already follow an asset allocation strategy, now may be a good time to review it and make sure it still fits your investment objectives.
Rebalance your portfolio. With any asset allocation, over time the percentages will stray from their intended targets. The beginning of the year is a great time to rebalance portfolios and make sure they fall back in line with the asset allocation percentages you originally selected. This should be done on an ongoing basis, either quarterly or annually, depending on your situation.
Contribute to your retirement plan. Max out your retirement plan contributions. Not only are these accounts great retirement savings vehicles that provide tax-deferred growth, but they also serve as an excellent asset protection tool as they are protected from malpractice lawsuits.
Save with a traditional or Roth IRA. If you are already maxing out your contributions to your employer-provided retirement plans, consider additional savings in a traditional or Roth IRA. Similar to your employer-provided retirement plans, these accounts offer excellent tax-advantaged growth.
All of these are important items to focus on at the beginning of the year. We recommend speaking with your financial adviser about how to best implement them for the remainder of the year and beyond.
Q: I forgot to make my IRA contribution before the end of 2016. Am I out of luck?
A: As a matter of fact, you are IN luck! The IRS allows you to make your annual IRA contribution by the tax deadline each year. So, for 2016 the latest date you can contribute to your IRA is April 17, 2017. As a reminder, you can contribute up to $5,500 if you are under age 50 and $6,500 if you are 50 years old or older.