By: Marta V. Plampin
How long has it been since you updated your will, balanced your portfolio or even balanced your checkbook? Is your debt piling up despite your best efforts to make ends meet? One of the most important New Year’s resolutions you can make is to commit to „financial fitness.” It may seem like an overwhelming task, so to help get you started, the following is a New Year financial checklist:
Balance Debt Management and Savings ¾ Paying off loans may be a better New Year strategy than saving. It may sound counter-intuitive, as it is relatively cheap to borrow money these days, however it can be relatively expensive to save because savings rates on popular short-term accounts have dipped below the rate of inflation. Using discretionary income to pay off loans boosts your spending power today and in the future, as well as provides a relatively generous, risk-free return.
However, you should remember that some debt is more onerous than other debt. Interest charges on credit cards and auto loans, for example, aren’t tax deductible. Interest paid on a home mortgage and most home equity loans is. That makes home loans comparatively less expensive after taxes.
Plan for a Job Change ¾ If you are making a job change in the New Year, don’t forget to review your retirement savings and pick a distribution election. A distribution is a payout of realized savings and earnings from a 401(k) or other retirement plan.
You must begin taking distributions from your account by April 1 of the year following the year in which you turn 70 ½. Your distribution options may include keeping your money in your plan, enacting a direct rollover or taking a cash distribution. Each option has different consequences, such as tax penalties.
If you have been let go or are your job has been eliminated at the end of the year, know what you are facing. Check if your employer offers severance pay, which can vary from none at all to six months or more of your current salary. Some companies may even reimburse you for unused vacation or sick pay. In fact, some states mandate that unused vacation be paid as wages.
If you are eligible, apply for unemployment immediately as it may take two weeks or longer to process all the necessary paperwork. And check out the terms of your loans as well. Some loans, such as student loans, offer payment deferral during periods of unemployment.
Shop your Insurance ¾ If you have been let go, employers with 20 or more employees are generally required to offer employees the opportunity to continue health benefits for a specified period of time, ranging from 18-36 months, premiums are paid entirely by the employee. This is called the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). This coverage is not cheap, but it enables you to guard against possible medical bills that could have a major negative impact on your financial situation.
Even if your job situation hasn’t changed, you should review your insurance annually to make sure that your coverage is appropriate to your current needs. Take into consideration new situations that may have affected your insurance requirements over the past year, such as, getting married, having a baby or purchasing a new home or car. Consider other possible new needs for coverage such as disability insurance or business liability. Check the pricing on your insurance plans against current prices.
You can do much research online and get educated on your options before even speaking with your insurance agent or financial advisor.
Create or Update your Will ¾ A will is a legal declaration that enables you to direct the disposition of your assets upon your death. While it is unpleasant to contemplate the possibility of your own demise, its very satisfying to know that you’ve put your financial house in order.
Work with an attorney who can help you divide your assets the way you. Also, if you have children, a will provides you with the opportunity to name a guardian. If you die without a will and have minor children, the probate court will appoint a guardian for them and there is no guarantee that the court’s appointment of a guardian will coincide with your wishes.
If you have a will, review it each year and make sure that it is up to date and relevant covering both tangible assets, such as your home or car, and intangible assets, such as bank accounts and mutual fund shares that are owned in your name. If you have assets but don’t have a will, start the New Year by drafting one.
Consider Charitable Giving ¾ It’s not just your house that might benefit from a year-end cleaning, your portfolio may represent an overlooked source of tax savings through charitable giving. By donating securities you’ve held at least a year, you become eligible to deduct their fair market value at the time of the contribution without triggering capital gains. In addition, you could receive the intangible benefit of personal satisfaction by helping others.
Seek Professional Help ¾ It’s a good idea to consult with a financial advisor to see how these or other year-end planning opportunities might work in your situation. Specific tax issues may also require a consultation with an attorney.
Marta V. Plampin
American Express Financial Advisors