The most troubling fiscal cliff on the horizon may be of your own making.
In a survey conducted last year, Fidelity Investments reported that the top financial resolutions going into the new year were saving more, spending less, paying off debt and establishing a household budget.
How did we do?
Not so well, according to the 2012 survey conducted by the National Foundation for Credit Counseling. Their results showed 56 percent of American adults do not have a budget; 40 percent saved less this year than last; and 39 percent carry over monthly credit card debt.
We looked to local financial planning experts for advice on actions to take as we head into 2013 and came up with five savvy financial moves that will help get you off to a financially healthy start.
1. Develop a financial plan and stick with it.
This may be stating the obvious, but advisers note established plans and budgets are not the norm for most people seeking their advice.
The greatest mistake many people make is not taking any action at all, according to David Giancola with financial services firm Meryl Edge. He suggests taking the first step and reaching out to a local banker, financial adviser or a tax professional and setting specific goals regarding your financial future and developing a plan to achieve those goals.
Wake Forest University School of Business professor Sherry Jarrell says, “Some people are actually afraid to look at the balance of their retirement accounts, fearing that they have lost a significant amount. Be honest with yourself, bite the bullet and see where your accounts stand right now. Define realistic financial goals and map out a strategy to achieve them.”
2. Make the most of savings, retirement accounts available through employer plans.
“Be certain to participate in your 401(k) or other retirement offerings if available through your employer,” said Sara Seasholtz CFP, president of Preferred Financial Strategies Inc. in Mooresville.
She advises contributing the maximum percentage of earnings, at least up to the amount your employer matches. Often that is 6 percent and employers generally match 3 percent. This means a total of 9 percent of pre-tax income is invested and tax deferred with 3 percent of that free money.
If you are over 50, the IRS allows you to defer an additional amount beyond the maximum annual contribution to certain deferred savings plans assuming you have not saved enough for your retirement. Talk with a financial planner and your employer’s benefit department to see if you qualify for this special “catch-up” provision.
Tax adviser Jay Reitzes of Reitzes Consulting, Inc. in Indian Land, S.C. noted another opportunity for additional savings with deferred income plans.
“Eligible taxpayers are able to receive a Retirement Savings Contribution Credit tax credit of up to $1,000, said Reitzes. “This credit is available for employer-sponsored plans such as a 401(k) as well as IRA and Roth IRA contributions. Contributions may be made up until April 15, potentially using a tax return to fund the contribution.”
3. Manage debt and credit wisely.
Understanding your credit rating and making sure it is accurate can save substantial money when applying for loans or credit. Seasholtz notes free credit reports are available from each of the three main reporting agencies (Equifax, Transunion, and Experian) annually at www.annualcreditreport.com. Request one from a different source every four months, and monitor your credit report for no cost.
“If you have credit card debt,” said Seasholtz, “Make a written list of each card and the respective interest rate on the unpaid balance. Manage your budget to pay off the highest-rate card first.”
4. Year-end tax strategies are for everyone.
Reitzes suggests that many people may benefit from a strategy of accelerating expenses and deferring income at year’s end.
“One of the easiest expenses to accelerate without much of a downside are real estate taxes and estimated state income taxes,” said Reitzes. “These bills may not be due until January, but if they are paid in December, they can be deducted a year earlier. Also, consider making charitable contributions (cash or property) by New Year’s Eve in order to take advantage of the deduction in this calendar year.”
5. Plan for the unexpected.
Having a cash cushion of four to six month’s salary in the bank is a general rule of thumb most financial advisers recommend. Seasholtz suggests a savings rate of 10-15 percent above contributions to your other retirement plans in order to be prepared to weather financial storms.
Insurance, particularly disability insurance, is another way of preparing for the unexpected. Seasholtz suggests exploring an individual disability policy. If you pay the premium and don’t deduct it, the individual benefit is tax-free. This can go a long way to making you whole financially if a disability occurs.