Credit: Shutterstock photoEvery January, some of us look in the mirror, dust-off our running sneakers, and set advantageous goals to lead a healthier and more active lifestyle. Unfortunately, little time or attention is given to address and fix our own fiscal well-being. Similar to setting health goals, financial planning goals can be best achieved if they are specific and realistic. Goals should have a time frame to implement and be written on paper. The following are the top five recommended financial resolutions to consider for 2013.
1.Eliminate Debt. Create an action plan and timeline to pay off your credit card debt as soon as possible (for example, over the next 18 months) and defer any major purchases until you can pay for them with cash. Develop a monthly budget and track your expenses on a spreadsheet or a mobile phone application. Dedicate any available discretionary cash flow to aggressively eliminate your credit card debt. Pay off debts with the highest interest rates first. Be careful to not quickly consolidate and close out any existing lines of credit, as that could adversely affect your credit score. Also, if you are a baby boomer nearing retirement with a mortgage, create an action plan to pay off that obligation within four years, before or after, your retirement goal.
2.Protect your credit score. Regardless of your age, your credit score may come into play for many critical activities from renting an apartment to applying for a new job. Protect and improve your credit score by keeping your balances low and paying off the majority of your expenditures every month. The FICO (Fair Isaac Corporation), the best-known and most widely used credit score model in the United States, is calculated statistically, with information from a consumer's credit files. A FICO score can be valued between 300 and 850.
Carefully review your credit reports at least annually to make sure you are not subject to identity theft. Identity theft occurs when thieves obtain your personal information, which can then be used to open new credit card accounts, obtain loans, or even clone your ATM card. Take action to protect yourself by shredding sensitive documents and being extra careful when sharing confidential information online (even Facebook). Obtain your free credit report from the big three bureaus (Equifax, Experian and TransUnion) at annualcreditreport.com .
3. Create a 'rainy day' fund. Develop a cash reserves bucket. Most people (before or after retirement) do not have enough cash reserves handy to get by for even two months in case of emergency or unemployment. They then start relying on retirement accounts, credit cards, family and personal loans to pay their bills and put food on the table. With many people unemployed for more than a year, you will need to save at least 12 -18 months of cash reserves to safely plan for your family and home necessities.
4. Increase your retirement savings. Many Americans are significantly underprepared to retire by age 65 due to insufficient savings and end up dependent on Social Security as their primary income resource. Lack of planning and work-place financial education seems to be an ongoing epidemic in today's society. Make a conscious effort to put off short term (instant gratification) purchases and instead make retirement savings a monthly expense item on your balance sheet with every paycheck. Dedicate at least 15% of your annual gross earnings for this goal. If you have the ability to receive a company match (such as in your employer's 401(k) plan) contribute at least enough to receive this 'free' money.
A good rule of thumb to consider is that you may need 13 to 15 times your final salary in a lump sum to retire successfully (considering a 4.5% portfolio distribution rate in retirement). Work with a financial planner (such as a CERTIFIED FINANICAL PLANNER™ practitioner from the Financial Planning Association) to assess your specific retirement budget and lifestyle goals on paper and then put together an action plan to achieve them. Once you retire, continue working with your trusted advisor to implement an ongoing investment and income distribution plan to keep you on track for the long run. Remember that in the end, you can't put your retirement on a credit card.
5. Protect your legacy. Many people do not even have their basic will and legal documents in order (or may never have even completed in the first place). At a minimum, make a resolution to meet with an estate planning attorney in 2013 to complete your will, durable power of attorney, medical power of attorney, living will and HIPAA (Health Insurance Portability and Accountability Act) release forms. For those who care for minor children or incapacitated adults, consider to assign a guardian and create trusts to protect and care those you love. For those who have large or complicated estates, work with an attorney on advanced estate planning techniques.
Finally, carefully review all of your investment and insurance account beneficiary designations to make sure they mesh with your current goals and wishes for your family and estate, as specific account level beneficiary designations will override your will and a court of law.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
