David McPherson shares his top five financial resolutions for the new year.
In the days ahead, you're sure to hear a lot of talk about financial resolutions to make for 2010.
Most of the time it will be good advice, but it's just that – advice. It's folks like me, financial planners and writers, telling you what's good for you. This year, I'm going to take a different approach by sharing with you some of my financial resolutions for the New Year.
The truth is that even those of us who dispense financial advice for a living could do a better job of managing our money. Sometimes, in fact, I feel like I spend so much time helping others that I let things slide on my end.
That's why I've made a few financial resolutions of my own for 2010. I suspect most readers will find that at least one of these goals could apply to them as well.
Hoping to end 2010 in better shape than I began, here are my top five New Year's financial resolutions:
1. Get back on budget: For years, I kept a family budget of one kind or another. It started as a hand-written summary of monthly income and expenses. Later on, I used the budgeting function in Quicken, the personal finance computer program. However, I found that to be overkill with so much detail provided that it overwhelmed.
Most recently, I used a simple spreadsheet that tracked gross monthly income in comparison to fixed and variable monthly expenses with one column dedicated to the current scenario and a second one to a projected (or maybe wishful) scenario. This proved to be the most effective approach, and I need to get back to it.
2. Get taxes done early: Once upon a time, I prepared my federal and state tax returns each February with the aim of receiving refunds in March. At that time, I worked for a large company, had taxes withheld from my paycheck, filed a fairly simple tax return and could count on receiving a refund.
Now, I'm self employed, and that means considerable more complexity. There are business deductions to track, variable income to juggle and estimated tax payments to make. As a result, there's a strong incentive to procrastinate. Over the past few years, I could be found rushing to finish my tax returns in the days leading up to April 15.
This year, I pledge to get started early even though I don't anticipate a large refund and could even end up owing a small amount. But I feel I will benefit by the organization and focus on finances that can result if you're not rushed at the end of the tax season.
There's just one big unanswered question: Will I continue to prepare my own tax returns or hire a professional, given the growing complexity of my tax situation as my business grows? At heart, I'm a do-it-yourselfer, but it's getting time to reconsider that approach.
3. Look at a Roth IRA conversion: As I've written before (and will write again), 2010 will usher in major changes for the Roth IRA, a retirement savings vehicle that allows for tax-free withdrawals in retirement.
Beginning Friday, individuals and couples earning more than $100,000 a year will join lower income Americans in being able to convert from a traditional IRA to a Roth IRA. A tax law signed by former President Bush in 2006 eliminated that cap effective Jan. 1, 2010. Also, there is a special one-year provision that allows anyone converting to a Roth next year to defer the resulting taxes owed until 2011 and 2012. That means convert now; pay taxes later.
When converting from a traditional IRA to a Roth IRA, you pay taxes on the front end in the expectation you will save money down the road by avoiding taxation on withdrawals in retirement.
The problem is that figuring out whether you are better off paying taxes now or later is complicated. There is no easy answer, and it's complicated by the uncertainty over the future of income tax rates in this country. My best guess is that taxes are going up; the only questions are when and by how much.
In my case, the plan is to dig into the numbers soon after Jan. 1 and consider converting a portion of my current traditional IRA accounts into Roth IRAs a little bit at a time.
4. Clean up my portfolio: As a financial planner, I urge clients to keep it simple when it comes to investing. As much as possible, I say, consolidate accounts at a single investment custodian like a mutual fund family or online brokerage and stick to low-cost index mutual funds or exchange-traded funds.
For the most part, I follow that advice. Most of my retirement funds are held at a single, well-known firm and are invested primarily in dirt-cheap index funds offered by Fidelity or Vanguard or Vanguard exchange-traded funds.
However, there are a couple higher-cost, actively managed mutual funds that I can't seem to bring myself to eliminate from my family's portfolio. One is a small-cap growth fund that has done well overall since I've owned it, but that has lagged its peers the past couple years and features a hefty 1.32 percent expense ratio. I know it's got to go, but I just haven't been able to pull the trigger and replace it with the type of fund I'd recommend to clients.
Now is the time to do it.
5. Make more and pay down debt: As the owner of a small business startup, my income these last couple years has been unpredictable and less than I would like. The good news, however, is that revenue from my business has been growing at a steady rate since I opened shop nearly three years ago.
After surviving the toughest economy of my lifetime, I'm optimistic about my business outlook for 2010 and confident my revenue will continue to increase. Assuming I can hold expenses steady (another financial resolution), I plan to dedicate any additional income to paying down debt aggressively.
Yes, even financial planners sometimes borrow money. In my case, there's a mortgage, student loan, auto loans and business debt. And today, I resolve to begin making extra principal payments and putting those payments on auto pilot to ensure I live up to what I've promised here.
There you are. I won't just be giving advice to others in 2010; I'll be taking some as well.
Happy New Year. |
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