Saturday, December 30, 2006

Do you know your money?

Below are 10 questions everyone should be able to answer about their money.

1. Does your employer match any of your retirement contributions and are you getting the full match?

Many employers offer to match all or a portion of the money you contribute to your employer retirement plan. This is free money and you should make sure you are getting as much of it as possible. If you aren’t sure whether your employer matches or if you’re getting the full match as your Human Resources or Benefits office for details about your plan.

2. What are your short-, mid- and long-term goals and are you on track to meet them?

If you don’t know where you’re going, how will you know when you get there? Just like you wouldn’t set off on a cross-country trip without directions, you shouldn’t be saving for your future without a plan. That plan should include your short- (within 12 months), mid- (within 5 years) and long-term (more than 5 years) goals and how you plan to get there. It’s important to come up with a plan that’s reasonable and to review it periodically to see if you’re still on track.

3. What’s on your credit report?

Credit reports are so important. They can impact all areas of your life, not just your ability to get a loan. Did you know that a bad credit report can result in higher auto expenses and that it could even make you lose a great job opportunity? It’s important to check all three of the major credit bureaus at least once a year. You can do this for free at I recommend getting one report (from each of the three) every 4 months. Each credit agency will report different information but with this method you’ll be on top of your credit and see each report at least once. If you want to know what your credit score is, you should visit to get your true FICO score. Scores gotten from other sources are typically not FICO scores. Before you spend your money on a score, just know that scores are only important if you’re applying for a loan. As long as you are paying your bills on time and there are no negatives on your report, your score should be fine so it isn’t necessary to buy your score very often.

4. How much will you need for retirement and are you on track to get there?

This is a pretty personal question and depends a lot on the lifestyle you want to live in retirement. There are dozens of financial calculators on the web that can help you figure out how much you’ll probably need and how much you should be saving to get there.

5. What kind of expenses are you paying for your investments?

Sometimes we are paying for expenses with our investments and we don’t even know about it. Does your fund have a sales load or a high expense ratio (anything over 1% is high)? Does your brokerage charge monthly or annual account maintenance fees? Review your accounts and make sure you’re getting the most bang for your buck. There is no reason to pay high expenses and fees when there are many well respected low or no-fee brokerage houses.

6. Are you in the right investments for your age, risk tolerance and timeline?

What was a good investment for you at 22 may not be so good when you are 42. Make sure that you periodically check your asset allocation to make sure that you’re investing correctly for your goals. There are many online calculators that will ask you a few questions and then give you a suggested allocation based on your responses. Take a couple of these and see where you stand. Make sure that you’re looking at ALL of your investments, not just one account.

7. Where does your money go each month?

You don’t have to know to the penny, but you should have a pretty good idea of what you’re spending your money on. If you don’t know, you should find out. You’ll probably be shocked to see how much you spend on certain expenses like coffee or eating out. To develop a budget, get a notebook and track all of your spending for 30 days. Write down every penny you spend and then put it into excel and categorize it into expense categories (entertainment, food, gas, etc.). The numbers will probably be eye opening and you might be surprised that by making a couple small changes you can free up a nice chunk of money each year to put towards your goals.

8. Which is better for you – a Roth or Traditional IRA?

This is a frequently asked question and the answer is: It depends. Much of the decision about whether to contribute to a Roth or to a Traditional IRA (TIRA) has to do with taxes. Generally a Roth is better for most people. See our article What's so great about a Roth IRA?

9. Are you getting the most out of your savings?

Many people are still using the savings account that their regular bank offers, and which only pays .5% a year. With the advent of online banks like ING Direct, Emigrant and HSBC, traditional savings accounts are going the way of the Dodo. With rates over 5% at these online institutions and transfers only taking a couple of days to complete, there’s really no reason to keep your savings in a low-rate account. For the latest list on the highest returns, check out these banking sites.

10. When will you be debt free?

Everyone wants to know the answer to this question. It’ll take some math and usually a budget, but you can find out if you put in the effort. Start by listing all of your debts in order of highest interest rate to lowest. Then list what the minimum payment is for each account. Finally, figure out how much money you have available to put towards debt each month. From there it’s simple math. You want to pay the minimum payment on all debts except for the one with the highest interest rate. You want to throw all of your extra money at that one with the highest rate. Once that one is paid off, you’ll add that entire payment to the minimum payment you were making on the next highest interest rate debt. This method will save you the most money and will get you out of debt as quickly as possible.

Wednesday, December 20, 2006

Are you ready for the new financial year?

2006 is ending and it’s time to start preparing for 2007 so you can start off on the right financial foot. Here are some things you can do now to make 2007 a financially fit year:

At work:

  • Increase your retirement contributions. The 2007 annual retirement contribution limit for 401(k) and 403(b) plans was increased to $15,500, so make sure you adjust your contribution levels accordingly. If you can’t max out the annual retirement contribution, at least try to increase your contribution 1% this year.
  • Review your FSA contributions. If your employer offers a Flexible Spending Account (also called a Cafeteria or Section 125 plan) it’s a great thing to take advantage of. Try to sit down and use your budget to figure out how much you’ll need for the next year. Remember, you can now use it for over-the-counter medicine like aspirin or cold medicine and things like contact lens solution. Just don’t over estimate since if you don’t use it by the end of the year you lose that money.
  • Double check your taxes. If you’re getting a big refund for this year, you probably need to take a look at what you’re having withheld each pay check. Your goal should be to break even at tax time and take that money you would have gotten in a lump sum at tax time and invest it monthly. If you aren’t sure how much you should have withheld, has a great paycheck calculator. Similarly, if you’ve had a major life change (house, marriage, divorce, etc.) that impacts your taxes you should double check that your withholdings are still correct.

On your own:

  • Review your asset allocation. As investments rise and fall throughout the year they can impact your asset allocation plan. Make sure that at least twice a year you are rebalancing your investment portfolio to make sure you stay on track.
  • Max out your Roth IRA . If you contribute $333/month to a Roth IRA you will have maxed it out for the year. The easiest way to do this is to set up an automatic contribution plan that will deduct money automatically from your checking account and invest it in an appropriate mutual fund. If $333/month is a bit too rich for your blood, look at the program that T. Rowe Price has that will allow you to start a Roth IRAwith as little as $50 to start and $50/contribution. If you haven’t yet maxed out your 2006 contribution you have until April 15, 2007 to do so, just make sure that you indicate that the money is for your 2006 contribution or they will credit it to 2007.
  • Do a budget check. Look over your budget for the last 12 months and see if there were any unexpected expenses that you need to plan for this year and adjust accordingly. Better to save up for that license plate renewal than to get caught by surprise!
  • Review your financial goals. Are you on track for your financial goals? Have you added/removed/changed any of them? Take a look and see where you are. Increase or decrease your savings based on any changes to your financial goals.