Now is the Time to Make Sure You Are Taking Good Care of Your Financial Self

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By Jim Wagoner, CPA | Partner, Director of Tax Services Group and Larry Greenwalt, CPA | Chairman of the Board

Of course you should also be taking good care of your physical self also! These two areas are in fact inter-related. You have heard many times about the importance of regular physical exams, good choices in food selection (and moderation), exercise, even if it’s just walking, and moderate alcohol consumption. So, just do it! Now let’s talk about your financial self.

It is a fact that most Americans have not adequately prepared for retirement. They haven’t saved enough, and they don’t know how much they will need in retirement. Let’s start by identifying a few things that you should do to be in a better position to take care of your financial future.

1. Be prudent. You probably have a good idea of how much income you have coming in each month, but do you know how much is going out, and where it is going? Ideally you should prepare a budget and try to stick to it. At a minimum, you should prepare an annual personal balance sheet, comparative with prior years, to measure whether you are gaining or losing ground. How much you spend matters more than how much you make!

2. Pay down expensive debt. Don’t carry credit card and other high interest debt. Using your cash to pay down debt costing 12% per annum is the same thing as investing your money and getting a 12% return (and there is no sure thing today that can guarantee a 12% return!). So make this a priority.

3. Lock in currently low, long term mortgage interest rates. This is one area where it is generally ok to have debt–on your home. But this is a personal thing, and some folks just feel better paying this off as fast as they can as well. If you haven’t refinanced your mortgage recently, you need to look into doing so. The shorter the term, the lower the interest rate. Personally, we think having liquidity and available funds that can be tapped into, outweigh the goal of using most of your funds to pay down your mortgage.

4. Pay yourself first. Once you have, 1) eliminated high cost debt and, 2) established an adequate cash reserve (one to two months of income), you should fund your IRA, or if you have a 401k, then fund your 401k thru payroll deduction. At a minimum you should fund at a level that maximizes your employer match. For example, if your employer contributes 1% of pay up to your 4% contribution, then you are getting an immediate 25% return on your money. Other examples of paying yourself first would be funding a 529 plan for college education, building your investment portfolio, etc.

Know this – you most likely will never be able to fund all that you will need thru your retirement accounts (even including social security) to comfortably retire. This is the reason you need to have nonretirement investment funds-and that is the American dilemma, which we will discuss in a future article.

5. Diversify. We all know that we need to do this, right? Today, the roller coaster stock market of the last several years may have caused you to retreat to cash. Excess funds in the bank are most likely being eroded at a rate of 2-3% a year, due to inflation alone-thereby eroding real wealth. We can help you tailor an investment plan to fit your comfort level and thereby minimize any erosion.

We’ll delve further into what you can do to take better care of your financial well being in our future enewsletters. In the meantime, you can work on enhancing your physical self!