Net Gains: Shape Up Your Finances for 2008
With a few quick steps you and your family can be financially protected.
Dec. 26, 2007 — -- It's the day after Christmas, a perfect time to sit back, reflect and begin thinking about 2008.
As you consider the financial side of life, you might want to adopt a few resolutions for the new year that will you end 2008 in better financial shape than you started.
This list is not exhaustive, but it is realistic for even the busiest individuals. Start small, and your chances for long-lasting success improve.
Turn on the auto pilot. The single best way to build a nest egg and reduce debt is by doing it automatically week after week, month after month. Start 2008 by signing up for your employer's 401(k), establishing an automatic investment plan into a Roth IRA or setting up automatic online bill payments.
Automating your financial life has never been easier, and over the next 12 months, it can make a big difference. It will boost your savings, cut your debt and cut the time you spend attending to your monthly bills.
Diversify
Built a nest egg you're proud of? Protect it and nurture its continued growth by making sure you're spreading out your investment risk.
Pull out your last retirement plan or brokerage statement and take a look at how your money is invested. Is it invested heavily in a single fund or single stock? Then you may need to diversify by spreading out your investment risk among different asset classes — large cap stocks, small caps, international stocks, bonds and cash. You might even want to consider mutual funds that invest in commodities or real estate funds.
If your money is invested in what's called a balanced or target-date retirement fund, then most likely you are well diversified. But if all your money is in that energy fund that the guy at the next desk told you has been going gangbusters, then it's time to diversify.
Buy Term
Chances are many of you reading this column lack adequate life insurance. Many people assume the coverage they received through their jobs is enough. Trust me, it's not.
Quite often, group life insurance offered by employers provides a benefit of just one and half times your annual salary. If you make $60,000 a year, carry a $250,000 mortgage and have young children, that $90,000 in coverage is not going to cut it in the event of your death.
The solution is to buy term life insurance, which is incredibly cheap compared to the protection it provides — particularly to parents with young children.
Even if your job provides a high level of coverage, owning an individual policy as a supplement is still a good idea. You want something in place to cover in the not unlikely event you leave your job someday, whether it's by your choice or theirs.
Check Who Benefits
The start of the year is a good time to check your beneficiary designations on retirement plans and life insurance policies to ensure they comply with your current wishes.
Maybe you were single with no children when you started with your current employer. Now, five, 10 or 15 years later you're married with two children.
What are the chances your parents and not your spouse and children are in line to receive the 401(k) funds you accumulated? Pretty good, I'd say. Forgetting to change such things once they are put in place is pretty easy to do.
And even if life circumstances do not change, other things may occur that make checking beneficiary designations a good idea.
I once worked for a company that changed its 401(k) plan. In the conversion process, everyone's beneficiary designations got dropped without notice. Months later we received a poorly written memo advising us we needed to designate new beneficiaries. Sure enough, when I checked, my wife and children were no longer listed as my beneficiaries. Had I died during that period, retirement funds my family could have been used would have been tied up in probate. Several years later, I suspect many of my co-workers are going about their work unaware there is nobody designated to receive their retirement money when they die.
Simplify
The more I work with clients, the more I come to believe many of us need to simplify our financial lives. Bank and investment accounts tend to grow like trees, sprouting new branches all the time. It's a natural process that requires periodic pruning.
If you're looking to bring some sense to your financial life, I say try to consolidate bank accounts and investment holdings. If you have two traditional IRAs, why not combine them? Are two bank savings accounts and one money market mutual fund really needed?
If not, consolidate and it will make it easier to manage your personal finances in 2008. Make it easier to manage, and you're more likely to better decisions along the way. Then you can end 2008 in better shape than you started it.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
David McPherson is founder and principal of Four Ponds Financial Planning (www.fourpondsfinancial.com) in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com
Chances are many of you reading this column lack adequate life insurance. Many people assume the coverage they received through their jobs is enough. Trust me, it's not.
Quite often, group life insurance offered by employers provides a benefit of just one and half times your annual salary. If you make $60,000 a year, carry a $250,000 mortgage and have young children, that $90,000 in coverage is not going to cut it in the event of your death.
The solution is to buy term life insurance, which is incredibly cheap compared to the protection it provides — particularly to parents with young children.
Even if your job provides a high level of coverage, owning an individual policy as a supplement is still a good idea. You want something in place to cover in the not unlikely event you leave your job someday, whether it's by your choice or theirs.
Check Who Benefits
The start of the year is a good time to check your beneficiary designations on retirement plans and life insurance policies to ensure they comply with your current wishes.
Maybe you were single with no children when you started with your current employer. Now, five, 10 or 15 years later you're married with two children.
What are the chances your parents and not your spouse and children are in line to receive the 401(k) funds you accumulated? Pretty good, I'd say. Forgetting to change such things once they are put in place is pretty easy to do.
And even if life circumstances do not change, other things may occur that make checking beneficiary designations a good idea.
I once worked for a company that changed its 401(k) plan. In the conversion process, everyone's beneficiary designations got dropped without notice. Months later we received a poorly written memo advising us we needed to designate new beneficiaries. Sure enough, when I checked, my wife and children were no longer listed as my beneficiaries. Had I died during that period, retirement funds my family could have been used would have been tied up in probate. Several years later, I suspect many of my co-workers are going about their work unaware there is nobody designated to receive their retirement money when they die.
Simplify
The more I work with clients, the more I come to believe many of us need to simplify our financial lives. Bank and investment accounts tend to grow like trees, sprouting new branches all the time. It's a natural process that requires periodic pruning.
If you're looking to bring some sense to your financial life, I say try to consolidate bank accounts and investment holdings. If you have two traditional IRAs, why not combine them? Are two bank savings accounts and one money market mutual fund really needed?
If not, consolidate and it will make it easier to manage your personal finances in 2008. Make it easier to manage, and you're more likely to better decisions along the way. Then you can end 2008 in better shape than you started it.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
David McPherson is founder and principal of Four Ponds Financial Planning (www.fourpondsfinancial.com) in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com
Simplify
The more I work with clients, the more I come to believe many of us need to simplify our financial lives. Bank and investment accounts tend to grow like trees, sprouting new branches all the time. It's a natural process that requires periodic pruning.
If you're looking to bring some sense to your financial life, I say try to consolidate bank accounts and investment holdings. If you have two traditional IRAs, why not combine them? Are two bank savings accounts and one money market mutual fund really needed?
If not, consolidate and it will make it easier to manage your personal finances in 2008. Make it easier to manage, and you're more likely to better decisions along the way. Then you can end 2008 in better shape than you started it.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
David McPherson is founder and principal of Four Ponds Financial Planning (www.fourpondsfinancial.com) in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com