Monthly Investment Message: December 2015

Barbara O’Neill, Extension Specialist in Financial Resource Management

Rutgers Cooperative Extension

30 Year-End Financial Improvement Tips

The final month of the year is a great time to review your personal finances. As the year winds down, take the time to review your financial progress and develop action plans for year-end tax savings and to achieve future financial goals and overall financial security.  Below are 30 suggested strategies to improve your finances:

Set Specific Financial Goals– Determine what you want, when you want it, and how much it costs (e.g., $14,000 to buy a car in 2018).  Once your goal is specific, divide the time frame into the dollar cost to see what you need to save.

Calculate Your Retirement Savings Need- Use a tool such as that includes factors such as age, life expectancy, anticipated sources of income, and the future value of existing savings (e.g., IRAs). 

Increase Retirement Savings– Save at least the amount your employer will match and more, if possible, up to the IRS limit. This is essentially “free money.” Even an increase of 1% of pay can grow to thousands of additional dollars later on.

Live Below Your Means- Spend less than you earn and use the difference to reduce debt and/or save and invest for emergencies and future goals.  Track expenses for a month to see where your money goes and adjust spending as needed.

Build Liquid Cash Reserves- Calculate your liquidity ratio, a measures of the adequacy of emergency savings, by dividing liquid assets (from a net worth statement) by monthly household expenses. The ratio should be 3:1 or better.

Pay Yourself First- Treat savings and investments with the same priority as a mortgage, rent, or car loan payment.  Save and invest automatically through an employer retirement savings plan and other automated deposits.

Invest for Long Term Growth- Put history on your side. Past investment performance data show a higher return in stocks, or growth mutual funds that invest in stock, than for any other asset class (e.g., bonds, cash) over the long term. 

Diversify with Mutual Funds- Get immediate diversification and professional asset management. Mutual fund investors can select from among thousands of funds and should match fund objectives with their personal investment objectives.

Harness the Power of Compound Interest- Calculate the number of years to double a sum of money by dividing 72 by the interest rate (example: 72 divided by 8% = 9 years). The longer and more frequently money compounds, the better.

Keep It Simple– Consider a “total stock market” mutual fund that tracks U.S. companies and a “total international” fund that provides exposure to companies overseas for a “low maintenance” approach to stock investing.

Develop an Asset Allocation Strategy– Split your money among asset classes. An example is 50% stocks, 30% bonds, and 20% cash assets. Keep your portfolio close to the target allocation and rebalance when target weightings shift.

Review and Rebalance– Determine the percentage of your portfolio in each asset class. Rebalance, if needed, by selling securities (note: capital gains are due on taxable accounts) or placing new deposits in under-weighted asset classes.

Benchmark Your Progress– Compare the performance of your investments with market indexes (e.g., the Standard & Poor’s 500). Your investment provider (e.g., a mutual fund company) can provide year-round performance data online.

Consider Selling Losing Investments- Determine whether losses in a poorly performing investment can offset capital gains in another. Declaring capital losses, while emotionally difficult, is a way to reduce your tax liability.

Keep Good Financial Records- Prepare a file folder for each stock or mutual fund that you own.  Save annual summary statements that list deposits and investment earnings to help calculate your capital gain or loss when shares are sold. 

Review Your Insurance- Contact your insurance agent to make sure you are adequately covering “big ticket” risks, such as liability, disability, health care expenses, loss of a breadwinner’s income, and destruction of your home.

Revise Your Tax Withholding- Consider revising your W-4 form to increase your take-home pay and minimize tax refund identity theft if you received a $500+ tax refund this year. Use the extra income to save and/or reduce debt.

Maximize Tax Breaks – Consider strategies such as contributions to tax-deferred retirement plans, tax-free municipal bonds, tax credits and deductions, and the long-term capital gains tax rate on investments held more than a year.

Plan Ahead to Minimize Taxes– Delay deductions and/or accelerate income if you expect to be in a higher tax bracket next year, so that you are taxed at a lower rate. Do the reverse if you expect to be taxed at a lower tax rate next year.

“Bunch” Itemized Tax Deductions– Shift the payment of tax deductible items (e.g., mortgage interest and charitable donations) from one year to the next to be able to itemize every other year if you are close to the standard deduction limit.

Calculate Your Net Worth– See where you stand financially at year’s end with a net worth statement. Subtract the amount that you owe (debts) from the value of everything you own (assets). The difference is your net worth.

Take the Wealth Test- Use the formula from The Millionaire Next Door with two key factors: age and gross income. Multiply these numbers together and divide by 10. The result is what your net worth should at least be equal to.

Shop Smart- Question your motives before you spend. Ask yourself “Do I really need this?” When you do purchase a product or service, follow the “Rule of Three” and ask for price quotes from at least three different stores or professionals.

Borrow Smart- “Shop” at least three lenders before applying for a loan or credit.  Compare the annual percentage rate (APR), various fees (e.g., late fee), and other loan features (e.g., rewards programs) and repay the amount owed quickly.

Check Your Credit– Review your credit report annually from the central site that allows consumers to request free credit reports from the three major credit bureaus (Experian, Equifax, and TransUnion):

Get Educated About Money- Take some time to learn about personal finance. Suggested learning methods are to take a course, read books or magazines, watch CNBC, view financial Twitter chats and websites, and consult a financial advisor.

Share the Wealth– Make year-end charitable contributions and you’ll receive a tax write-off if you can itemize deductions. Example:  $100 donation x .25 (25% tax bracket) = $25 tax savings and a $75 out-of-pocket donation cost.

Plan Your Estate– Prepare key documents including a will, living will, and power of attorney. Remember that everyone has an estate plan: either one they prepare themselves or one established by their state of residence. The choice is yours.

Develop Financial Resilience – Build financial resilience with adequate savings, low household debt, marketable employment skills, and a social support system. Resilience is the ability to “bounce back” when bad things happen.

Think Positive- Believe in the saying “if it is to be, it’s up to me.”  Positive people generally experience greater success than “naysayers” because they believe there’s a connection between what they do today and what happens in the future. 

As you celebrate the holiday season and buy gifts for loved ones, give yourself the gift of financial security with carefully considered action steps to start the New Year off right. Making some critical financial moves now can result in a brighter financial future later. Today is the first day of the rest of your financial life. Make the most of it!

Check out our Archived Monthly Investing Messages.