It’s that time, again. The end of the year is here and many people are sitting down to make New Year’s resolutions in different parts of their life. Many are evaluating their financial situations and what can be done to improve them in 2012. As you look forward to the New Year, use this opportunity to review your finances and find areas for improvement.
Aside from obvious fixes such as spending less and saving more, consider these five areas where you can make resolutions that will help shore up your financial future.
1) If you are currently participating in a 401(k), 403(b) or 457 plan through your company or organization, take time to evaluate the amount of your contributions and if you can allocate more to those accounts. These plans have become a major source of retirement savings for many individuals, so it deserves extra attention.
Many companies offer a matching provision for your contributions that equates to free money, so be sure to check with your plan to see if you are taking advantage of that match. The maximum contribution limit for 2012 has been increased to 17,000, which is an increase of $500 from previous years. In addition, those over the age of 50 can contribute an extra $5,500 as part of the “catch-up provision” that allows those approaching retirement to save more. These contributions, when withdrawn, generally are taxed as ordinary income.
2) Review and rebalance your investment portfolio. Over the course of the year, the market value of each security earns a different return and therefore changes the weighting of your portfolio.
Rebalancing is the process of buying and selling portions of your portfolio in order to reset the weight of each asset class back to its original state. It is not assured that investments that performed well in 2011 will repeat in 2012, so it is important to review and rebalance your investments across all accounts on occasion. Of course, rebalancing does not assure a profit or protect against loss.
“Usually about once a year is sufficient,” recommends Derek Ward, Financial Advisor with Morgan Stanley Smith Barney in Houston. “However, if your investments are underperforming compared to their peers, then you may want to consider making a change.”
3) Determine if the amount of life insurance and disability insurance is appropriate for your current stage of life. Although it is a topic we would rather not think about, it is incredibly important not to be without it in case of the unforeseen.
Ward says, “Be sure the amount of life insurance you are carrying is enough to take care of your dependents and potentially your business partner should something happen to you so that your family and business can continue.” He also suggests doing the same with disability insurance, in case you are injured and cannot work, along with homeowner’s insurance to cover the cost of your home should it be destroyed.
4) The beginning of the year is a good time to take a look at your financial documents and be sure they are up to date with correct information for your intended beneficiaries. These documents may include a will, living trust, power of attorney and beneficiary information for 401(k) or IRA plans.
These are all incredibly important financial instruments should tragedy happen. You want to be sure the documents reflect who can make decisions and how your estate should be handled in case the worst happens in the next year.
5) How extensive is your emergency fund? Common advice is that an emergency fund will run anywhere from five months to nine months of expenses. These are funds that can go towards unexpected car repairs, medical work or even to supplant income if you lose your job.
If you do not have any emergency fund, consider if now is the time to start so you can be prepared for any unexpected expenses or changes 2012 may bring.
Be cautious about setting too many goals or objectives for the New Year that may be unrealistic for your financial situation. Take this opportunity to revisit these areas of your financial life and decide what changes need to be made in order to make sure your money is truly working for you.
Remember that these resolutions are not specific to 2012, but should be areas you reevaluate each year to ensure you have your financial house in order.