End-of-Year Financial Tips
As another year of economic recession winds down, every dollar saved is important. In addition to plain common sense and coupon cutting, there are strategies and tips to keep in mind as the year ends and tax season approaches. Here are some proactive steps to helping 2010 be a year of financial improvement.
Create an automatic savings plan. Pay yourself first. The secret to saving isn’t so much paying yourself first as it is making it happen automatically. Think of how likely you are to save money every week if you had to go to the bank and actually make a deposit in person. On the other hand, imagine $50 coming directly out of your paycheck and going into your bank account every week. Are you going to even notice it?
So, if you don’t currently have an automatic savings plan, you need to create one for the new year. One easy way to do this is to simply contact your human resources department and get a direct deposit form. Most will allow you to create multiple deposits. So, you could have your direct deposit to save $50 per paycheck to go into your savings while the remainder goes into your regular checking. It’s simple and effective. If that isn’t an option, or you want a little more control, establish an automatic recurring online transfer from your primary account to your savings. With most banks this is very easy to set up, and in many cases, you can even transfer funds between banks, which works out well if you have a high-yield savings account that isn’t at the same place as your primary bank.
By setting up this recurring automatic payment, you’ll painlessly stash away a little bit of your money without even realizing it.
It doesn’t matter if it’s just $10 a week or $500 a week, but every little bit will go a long way in building up your emergency fund. You’ll be surprised at how much you have saved by the end of the year. And if you’re already doing this, use the new year as an excuse to increase how much you’re saving. Even a small amount makes a big difference over time.
Review/Maximize your W-4 exemptions. With April still months away, taxes are probably the last thing on your mind, but this is a perfect opportunity to make an important decision.
If you’re employed and have taxes automatically withheld, you can adjust how much is withheld from your paycheck with your W-4. If you have too much being withheld, you’re giving the government a free loan and have to wait until you get your tax refund to put it to work. On the other hand, if you’re having too little withheld, you’re stuck with a nasty surprise and will owe the IRS some money. Ideally, you want to withhold enough so that you don’t owe any taxes at the end of the year while not withholding so much that you end up with a few thousand dollars in a refund.
By getting your withholding as close to the sweet spot as possible, you’re putting more money in your pocket each paycheck that can be used to fund other goals while having enough set aside to fully pay your taxes. You want to do this early in the year so the effects are minimized. If you have more or less coming out of your paycheck, the difference will be much smaller if it’s spread out across 52 weeks as opposed to making the change somewhere down the road where you have less time to make up the difference.
Establish a suitable investment portfolio. If you’re unsure of where to start, look for a simplified approach. If your retirement plan at work doesn’t have a lot of options, or funds with high fees, try to stick with an index fund or two. If that isn’t an option, look to see if they offer any lifecycle or target date funds. These funds are usually pre-allocated in a way that’s suitable for your age or risk tolerance. While they may carry a slightly higher fee than an index fund, it can simplify your finances while easily giving you some basic diversification.
Beyond that, if you’re investing on your own, now is a good time to review your funds and see if there are any changes to be made. The fallout from this economic downturn has created a number of problems. Fund mangers have been fired, long-term winners are now big losers, and even fund expenses may have gone up. So, make sure you’re aware of any changes your funds may have undergone, and verify that those funds are still suitable for your investment objectives. In many cases there will be no changes needed, but a quick review will make sure that is the case.
Review your budget. Whether you follow a detailed budget or not, the new year is a perfect time to analyze your expenses and how you spend your money. If it’s been a while since you’ve looked at your budget, a lot of things may have changed. An increase or decrease in pay, a new child, added expenses, fewer expenses, and so on. These changes can significantly impact your spending, so the sooner you adjust for them, the better. Sit down and do a quick analysis of your expenses.
You’ll still have most of your fixed expenses on items such as housing, insurance, etc. But where you want to focus your efforts is on flexible expenses. Food, entertainment, repaying debt, and hobbies are places you can make the biggest impact. Cutting back on a few nights of eating out, getting rid of a magazine subscription, or even shaving a few dollars off of your entertainment can go a long away. Again, it goes back to making small changes that are spread out over the course of a year. Saving $30 a month on food doesn’t sound like much, but if you do that throughout the year, you’d have nearly $400 that could have gone into your emergency fund, retirement account, or applied to credit card debt.
There are also simple steps like negotiating lower interest rates with your credit card lenders and your bank on loans, using the “seven-day” rule on purchases (this pertains closely to differentiating between needs and wants when deciding on purchases), looking into Roth IRAs or similar long-term savings plans, paying off high-interest loans first, and paying more than the minimum payments on credit cards or other rotating debts with interest. Working incrementally but consistently is the best plan in the long run.
