Five Important Financial Check-Points for the New Year

With the New Year upon us, now is a good time to review your finances to ensure you are still on track with your financial goals.

Retirement Allocation

Check the targeted allocation of your financial portfolio.  Is your 401(k) still allocated with the proper stocks, bonds, and cash allocation you initially intended?  Last year was a record year as far as the stock market was concerned.  Due to the increased value of stocks in 2013, your 401(k) allocation may be too stock heavy now.

Review the allocation balance of your stocks vs. bonds vs. cash.  If the allocation is too stock-heavy, move some of your money from stocks into either bonds or cash.  Doing this not only keeps your 401(k) allocated the way you intended, but will also help cushion any financial losses you may face if the market sputters in the beginning of 2014.  After all, what goes up, always comes down and if you properly reallocate your assets now, you will avoid a potential big loss later in the year.

College Funds

With each passing year, the kids are getting closer and closer to college.  How is your child’s college fund allocated?

When you initially opened your child’s college fund, odds are you invested heavily in stocks to get a higher return.  As your child gets closer to attending college, be sure you are reviewing your allocation dispersal.

You need to be sure that as your child ages, their college fund becomes less risky and more conservative.  If your child is within five years of attending college, you should not be investing any new money in stocks, and you should be moving existing money out of stocks and into cash and bonds.

If the market crashes and your child’s college fund is heavily allocated in stocks, you run the risk of losing everything you saved for your child’s education.  Review your college accounts now, before it’s too late.

Beneficiaries

Reviewing your beneficiary designations is an important step that should not be overlooked.  Be sure your beneficiary information is up-to-date, especially if you have had a recent life-changing event like a divorce, second marriage, or the death of a spouse.

It is important that all beneficiary information is updated including beneficiary’s names, social security numbers, and relationship.  If you are unsure if your beneficiary information is updated, contact your financial institution.

Rainy Day Funds

Having a six-month rainy day cushion is an important allocation of cash to have available.  Rainy day funds help protect you if you ever lose your job, or if you have a major repair needed on your house.

Having six months of cash saved in a money market will allow you some flexibility if you are ever faced with a situation where you need immediate cash.

Review your current rainy day allocation.  Did you borrow against it last year and now need to replenish the funds?  Have you just never saved toward a rainy day fund?

Be smart and get this fund updated to meet six months’ worth of salary.

401(k) Contribution Percentage

A lot changes in a year.  Maybe the kids are all off to college now and you don’t need as much for the grocery bill now that they are moved out.  Save some of that extra dough in your 401(k).

Or maybe you are now expecting a new little one in the house and need to find some extra money to feed an additional mouth.  You might be able to decrease that 401(k) contribution that you have been maxing out the past few years.

No matter what you do, be sure you are at least matching your employer’s contribution.

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Building Your Rainy Day Fund

By John Focht

Setting aside money each paycheck is tough on many fronts.  First, how and where do you actually find the extra dollars to squeeze out of your pay to set aside?  And second, isn’t it nicer to reward yourself with something you actually want with those extra dollars you squeezed from your pay?

Sure it would be nice to use the extra savings from your pay to treat yourself to something nice, or spend an extra round on the golf course, but it’s also important to set aside for that rainy day just in case.

Most financial experts agree after you put savings away for your 401(k) and IRA , the next important savings spot for you is building a six month cushion in cash.  Building a rainy day fund of about six months of salary provides you some emergency cash if you are ever in a situation where you are laid off or lose your job.

Building a rainy day fund also affords you the opportunity to have immediate cash on hand if you need it for a household emergency like a new roof, hot water heater, refrigerator, or washer or dryer.

Also, be sure to save in a money market or cash savings account.  You should not be saving a rainy day fund in any type of stock or high-risk mutual fund.  If the stock or mutual fund takes a hit, your cash reserve fund will also take a hit.

So, how much should you save each paycheck?  Start with whatever you can actually set aside.  A good starting point is taking stock in how you are currently spending your money. Once you have a good sense on what your spending habits are, it will be easier to start saving a little extra each paycheck.  Creating a family budget will go a long way in helping you toward building a cash reserve fund.

Once your spending and budget are in check, setting savings aside each paycheck should come with ease.  Put aside whatever you can initially with the goal of eventually setting aside 10% of your paycheck toward savings.

Continue saving until you hit that six-month salary mark.  Once you do, reward yourself with something nice.  Next, it’s to start setting aside savings for the kids college!

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Setting Aside for Your 401(k)

Most financial experts will tell you the importance of saving for retirement, for college, and saving for a rainy day.  All sounds good in theory, but how do you get there?  After all, there’s the mortgage, bills, kids’ activities, and the list goes on and on.  How do you get to the point where you can save for retirement, the kids’ college, and for a rainy day?

First you need to get to a starting point and begin laying out a plan.  Your plan should not focus on saving for all major savings goals all in one shot, but instead should focus how you will cut back your spending over the next few months in order to start getting to your savings goals.  If you try to figure out immediately how to save for everything, you will be overwhelmed with the whole idea of saving.

Most financial experts agree that the first major savings goal you should look to accomplish is maxing out your 401(k) contribution to meet your employers matching program.  By putting a percentage of your paycheck into your 401(k), you have accomplished two tasks: lowered your taxable income and increased your pay from your employer.

By investing in your 401(k), you have lowered your taxable income by the percentage of savings you are deducting from your paycheck into your 401(k) account.  All monies invested into a 401(k) are pre-taxed, so that 2% or 5% or 10% that you put into your 401(k) has decreased your taxable income by that amount.

Secondly, employers match up to a certain amount of your 401(k).  Whether they match dollar-for-dollar, or 50% of the dollar up to a certain deduction amount, it is still additional pay your employer is giving you.  Granted you will not get that money until at least 65 years of age, but it still increasing your pay and the money your employer is paying you.

At bare minimum, you should be investing into your 401(k) as much as your employer matches.  If your employer matches dollar-for-dollar up to 4% of your investment, you need to figure out a way to invest 4% of your paycheck into your 401(k).  If your employer s matching 50% of your investment up a certain percentage, say 6%, you again need to find a way to invest 6% of your pay.  After all this is basically free money your employer is giving you to invest in your 401(k).  You should figure out immediately what expense you need to cut back on to get that 401(k) match from your employer.

Once you have put yourself in position to save for your 401(k), you can begin looking at the next hurdle you need to save for.


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