With these plans in place - and, ideally, in writing
- you can track your progress every month or quarter
and make adjustments to your personal money management
if necessary.
Get matching contributions
If your employer offers a retirement plan such as
a 401(k) with an employer match, contribute at least
as much of your 2010 salary as required to get the
maximum match. If you don't get your full employer
match, you're forfeiting free money.
Build a cash reserve
Financial advisors often tell clients they should
keep three to six months worth of expenses in cash
to handle unexpected expenses. If you have ample home
equity and a home equity line of credit that you can
access easily, three months worth of spending money
may be adequate. If you do not have ready access to
a line of credit, you may prefer to have six months
of expenses in your emergency fund.
Here's one way to determine how much to keep in cash:
Example: Matt Bernard decides to maintain a six month
cash reserve. In 2009, his gross income was $100,000;
Matt paid $20,000 in total taxes and saved $10,000.
Therefore, Matt calculates he spent $70,000 last year:
$100,000 minus $30,000. If he spent $70,000 over the
past 12 months, he'll need $35,000 in cash to provide
a six month cushion.
Your cash reserve should be accessible. Thus, you
should be able to obtain that money quickly, without
paying taxes or penalties. A one year certificate
of deposit may not be a good choice because you'll
lose interest if you make a premature withdrawal.
Instead, you generally should hold cash in a money
market fund or bank account that permits penalty free
withdrawals.
In addition, you should not hold your cash reserve
in an IRA or similar tax-advantaged retirement account.
You'll probably owe tax (and perhaps a 10% surtax
if you're under age 59 ½) on withdrawals, so
a $10,000 cash reserve might be worth only $7,000
or $7,500 in spendable dollars.
Pay down debt
If you pay down the balance on a credit card that
charges a 12% interest rate, for example, you will
effectively earn 12%, after tax, with no investment
risk. You also may do well to pay off other types
of debt, depending on the interest you're paying and
whether it is tax deductible. Our office can help
you calculate your after-tax return if you prepay
a home mortgage, student loans, or other outstanding
debt.
Protect yourself and your
family
You probably have many insurance policies - in fact,
you may not be aware of all the coverage you have.
At the same time, you may lack some vital types of
insurance. Therefore, you should promise yourself
to review your current insurance. Include any policies
you have acquired on your own as well as benefits
provided by your employer.
Once you know what you have, you can decide whether
to add missing coverage. Alternatively, you might
be able to cut back on unnecessary insurance and save
money on future premium payments. Generally, insurance
falls into one of two categories.
Property/casualty:
This category includes homeowners and auto insurance.
You probably will want enough coverage for losses
or damages to these valuable assets. Just as important,
you should have adequate liability coverage to protect
your personal net worth if someone is injured in a
home or auto accident. In fact, you may decide you
need an "umbrella" policy for extended liability
coverage.
Life and health:
These coverages include health, life, disability,
and long-term care insurance. Many employers provide
some coverage and offer employers the chance to buy
more at favorable rates.
To see whether you have enough coverage, you may
want to schedule two meeting with insurance professionals:
one who specializes in property/casualty and one who
deals with life and health policies. After these meetings,
you may decide you should have more coverage. More
coverage, however, means higher costs. Indeed, you
may be surprised to discover how much you're paying
for all of your insurance. If you'd like to cut insurance
costs without increasing your risk of financial catastrophe,
you might be interested in assuming higher deductibles
for some coverage.
Toscano and Ardito, CPA,
can help you evaluate the tradeoff between paying
lower premiums and assuming responsibility for uninsured
outlays.
Source: January, 2010 CPA
Client Bulletin; a monthly publication of the AICPA)
