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A new year, a new (personal-finance) you

With the new year comes an opportunity to start fresh. Just as you might be thinking of a healthier lifestyle, why not take a healthier approach to your personal finances? Here are some personal finance exercises worth considering.

1. Get your arms around what you spend your money on and come up with a spending plan. The feedback we get from clients who do this is that they are shocked at how much various expenses add up to over a year. It might not seem like much on a daily basis, but measuring it over a year is much more meaningful. Quicken is a great tool for this purpose as it allows you to drill down to the details. Transactions automatically download when you link your bank accounts and credit/store cards. You’d need to spend some time properly categorizing them in a way that is meaningful to you. In doing this, you’ll likely find areas where you can cut back and free up cash for other needs and goals. It might even be things you wouldn’t miss or aren’t using. Remember that even small annual savings add up to big savings when added together. This exercise provides you with the information needed to make informed decisions on how you want to spend your money and feel more in charge of your finances.

2. Prioritize how to apply every dollar

  • Emergency fund. It’s important to have an emergency fund of three to six months of living expenses, depending on the economy, your job security or if you’re retired. However, even a month’s worth of living expenses might be fine if you have high-interest credit card debt to focus on (possibly from all that holiday shopping?).
  • Pay down debt. Pay down smaller balances first. That will give you the sense of satisfaction and motivation to stick with it. As you pay off balances, apply the freed-up payment to the next higher balance, and so on. The snowballing effect will help you pay down those bigger balances more quickly and they won’t seem so daunting. The interest savings and peace of mind is worth it. Plus, once all those balances are paid off, you’ll have freed up cash flow to apply to other goals. Steer that freed-up cash flow to those goals before it plumps up your lifestyle.
  • Retirement savings. Even if you have debt to pay down, you should still consider contributing a smaller percentage of your income to retirement savings. If you can participate in an employer retirement plan, maximize any employer matching contribution since that’s free money. If your employer doesn’t have a retirement plan, consider IRA contributions. If you’re self-employed, there are various types of retirement plans you could set up for your business. Contributing as much as you can as early as you can gives you the opportunity to enjoy tax-deferred compounding, allowing that balance the greatest growth opportunity over time. This goal should take precedence over college savings.
  • College funding. As parents, we often want to help our kids as much as possible. But that can’t come at the expense of your retirement security. There are no loans or grants for retirement (darn it!). And trying to catch up on your retirement savings after your kids are out of college won’t have the impact you may think it would. Too many years of lost compounding will significantly inhibit the balance you can accumulate. That being said, it’s still good to try, but better to avoid putting yourself in the position of needing to catch up in the first place.

When the time comes, manage your child’s expectations about college choices to affordable options so as not to put too large a financial burden on you or your child. It’s good to apply to various colleges because you never know what aid package they might offer, which could make some affordable when you didn’t think they would be. But make sure your child knows net price is a consideration on final selection and the sky isn’t the limit.

In the meantime, online shoppers can add to their college savings by linking to your desired retailer through the Upromise web site (www.upromise.com). Most retailers contribute 2 to 5 percent of your online purchases to free college savings for you. You’ll need to register at upromise.com. You can link your 529 plan accounts so the free college savings can automatically be transferred to them. To earn more, you can register your grocery store card there to earn credit for purchasing certain items you may buy anyway. You can join their dining program and register your credit card in order to earn additional college savings on restaurants you go to anyway. Hey, why not? I’ve accumulated a few thousand dollars over time this way.

3. Estate planning. If you don’t have your estate planning documents in place, or if they haven’t been updated in a while, this should be a priority just in case. The documents should include your will, power of attorney, and health care proxy/living will. In addition, now is a good time to review your beneficiary designations on all employer retirement accounts, IRAs, life insurance coverage (owned personally or through work) and annuities to be sure they are current and have both primary and contingent beneficiaries named. You should understand how your overall estate plan would work based on the types of assets you have, how they are owned, and who you’ve named as beneficiaries.

4. Insurance coverage. Review your property and casualty coverage (auto, homeowners, personal liability) and deductibles to be sure they fit your situation. Your life insurance coverage should be sufficient to provide for your family should something happen to you. Other purposes could include coverage to provide liquidity to your estate for debts or estate taxes, especially if you own a business or have a special needs child. Long-term disability insurance should be reviewed or considered. What if you no longer could earn a living? Long-term care insurance is another type of coverage that should be considered to make informed decisions on whether it’s a viable/fitting option.

Just think how good you’d feel if you had these areas all covered and could handle them with purpose? It’s a new year and a new opportunity! Get to it.

Cindi Turoski is a managing member of Bonadio Wealth Advisors based out of our Albany, NY office.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.