20 Smart Money Moves
1. Put your pay-down-debt plan on autopilot. That credit card balance isn’t going to magically go away on its own. The experts’ advice? Make a plan to pay it off, then do it automatically. Your credit card statement tells you how much you’d have to send in every month to be debt-free in three years. Want to be back in the black sooner? Use Nationwide.com’s Credit Card calculator to figure out how. Then, “set up an online bill payment so that amount is deducted every month from your checking account,” says Gerri Detweiler, personal finance expert at Credit.com.
2. Enjoy your two-percent bonus. Maybe you missed it, but payroll taxes are going down in 2011, meaning that you’ll see an extra two percent in your paycheck. For workers making $50,000, that’s an extra $1,000 this year. Put it to good use by bumping up your 401(k) contribution up by 1 to 2 percent, putting the extra greenery into an IRA, or paying down debt.
3. Make the most of your 401(k) match. Nearly 40 percent of employees enrolled in a 401(k) plan aren’t contributing enough to get their full company match, according to a survey by Financial Engines. If you’re lucky enough to work at a company that will match 50 percent of everything you put in, up to 6 percent of your salary, then you should contribute 6 percent of your salary. “That’s like getting a 50 percent return on your money right away,” says Tom Adams, a financial planner in Downers Grove, IL. “It’s just a no-brainer to do that.”
4. Actually, aim for 15 percent. That’s right. You should try to put 15 percent of your income into retirement savings. Most experts think that is the bare minimum you should be contributing. One shortcut: If your employer matches, it’s okay to count that as part of your cut. (So if your company throws in 3 percent, you can get away with 12 percent.) “If you have at least 15 percent of your earnings contributed to retirement and continue doing that for the long run, you’ll have a very good chance of being able to live a comfortable retirement without having to work until you’re too old to enjoy it,” Adams says.
5. Put money in a Roth IRA. If all of your retirement savings are in a 401(k) or traditional IRA and tax rates soar before you retire, you’ll end up with less money after taxes than you’d planned. Hedge your bets by saving in a Roth IRA as well. There you contribute post-tax money and withdraw the cash tax-free in retirement. This is especially smart if you’re in a lower tax bracket now than you think you will be when you retire. If you can, max out your 401(k) and then save another $5,000 in a Roth. If you’re spreading your 15 percent around, split it between your 401(k) and a Roth, making sure you’re putting enough into your 401(k) to get your company match.
6. Adjust your withholding. Expecting a fat tax refund this year? That’s nice, but it means that the U.S. government has been holding cash for you, interest-free, for the last 12 months. Use the IRS Withholding Calculator to figure out how you should tweak your W4 form for more appropriate tax withholding. Then use the extra cash each month to pay down debt, put money into an IRA, or save for something great. Here’s more information on how to adjust your withholding allowance.
7. Refinance. Got a mortgage? Rates have been rising lately, but are still ridiculously low compared to historic norms (and won’t stay that way forever). That makes this a great time to rework the numbers on your home loan. Just make sure you’re planning to stay a while so that the few thousand in closing costs are more than covered by the lower monthly payment. “There’s a break-even point,” says Clarissa Hobson, a financial planner in Colorado Springs, CO. “If you’re not going to be in that house for three to five more years, it may not make financial sense.”
8. Write an annual (not monthly) budget. It’s tempting to create a spending plan out of your fixed monthly expenses, plus some discretionary wiggle room. But not everything fits neatly into a month-by-month time frame. Consider unexpected car repairs and holiday shopping. “We find that the non-monthly expenses are what knock people’s budgets off track,” says Greg Gilbert, a financial planner in Atlanta. “You must have a place in your budget for those.”
9. Automate your savings. It’s one of the easiest ways to save. Write down your top savings goals—retirement, emergency fund, college, down payment on a house—whatever’s important to you. Then, on paydays, have your bank automatically transfer cash from your checking account to an interest-earning savings account for those goals. That way, your savings goals are funded first, before you’ve even seen the cash in your bank account. Go ahead, feel virtuous.
10. Try cash only. If you’re having a hard time setting and sticking to a budget, try the envelope system. That is, for all of your discretionary spending categories (groceries, dining out, entertainment), keep the money for those categories in separate envelopes. When you run out of cash, you’re done spending for the month. “As low tech as it seems, it just works,” Gilbert says. “Utilizing cash really can impact a budget overnight.”
11. Pass on zero-percent-interest loans. Sure, you can get a great deal on that car, couch, or other big ticket item. And you can borrow money to pay for it! But in the end, you’re just inviting more debt into your life. And life is uncertain. If you lost your job tomorrow, could you pay it back? “You’re going after debt and buying things ahead of time, versus having the money to pay for them,” Gilbert says. For more financial stability, try it the other way around—save the money before you buy an expensive item.
12. Get paid to shop. Are you an online shopper? Don’t pass up free cash for your troubles. One method: Ebates, which pays you cash back for accessing your shopping site via the site’s online portal. Another option: Upromise, which deposits money into a 529 plan of your choice when you use a registered credit card at a participating store or when you do your online shopping through that site’s online portal. If you’re not getting money back for shopping at Target.com, you’re missing out.
13. Boost insurance deductibles. Most people go for the default deductible when they sign up for car, home, and renters insurance (a deductible is the amount you have to pay out of pocket before the insurance company will cover your claim). But you may be able to lower your annual premium by raising your deductible. Ask your insurance company how much your premium would drop if you go higher. Then figure out how long it would take for the savings to cover the difference in your deductible. (For instance, if raising a deductible from $500 to $1,000 would save you $100 a year, it’d take you five years to save the difference if you don’t make a claim.) That said, make sure you have the cash on hand to cover the extra expense if you need to. If it takes more than a decade to hit the break-even point, it’s probably not worth the change.
14. Buy an umbrella policy. Got a house and a car? It’d be wise (and not terribly pricey) to spring for an umbrella liability policy that kicks in where the liability coverage on your home and auto insurance ends. “It can be pretty valuable if something bad happens,” Gilbert says. You can probably pick up a $1 million policy for $100 to $200 a year. And look for an Umbrella Policy that has Uninsured Motorist in the coverage limit!
15. Save for emergencies. Yes, you know you’re supposed to have an emergency fund. Blah, blah, blah. But, given the continued weak job market, it’s seriously worth your while to build up a cash cushion in case your boss delivers a surprise pink slip. Most experts recommend you keep at least six months of living expenses in an interest-earning savings account or money market. Start small, if you have to. But start.
16. Get life insurance. If you have children or other dependents, a significant other and own a home or have considerable debt, you need life insurance. (Here’s the test: If you died, would your partner be up a financial creek without a paddle?) Experts say you should both own a term life policy worth roughly 10 times your annual salaries.
17. Rebalance your investments. When’s the last time you checked to see what percentage of your investment portfolio was in stocks vs. bonds or cash? Or whether the percentages you picked for different fund allocations was still intact? (Was Bill Clinton in office?) Early in the year is a good time to look at your statements—in your 401(k), say—and make sure that your mix of stocks, bonds and cash hasn’t wandered too much from your target. (Let’s say 80 percent stocks, 20 percent bonds for a young adult). If you were splitting your money between funds (50 percent in one and 50 percent in another, for instance), check on those balances as well. A good rule of thumb: If your investments have strayed more than five percent from their original allocation, it’s time to restore order. “Asset allocations need to be reviewed regularly, not put on autopilot and forgotten,” says Sid Blum, a financial planner in Evanston, IL. Here’s how to do it.
18. Plan for the uninsured guy. When you bought car insurance, you may have opted for the minimum liability coverage required for uninsured/underinsured motorists. But guess what? Now that cash is tight and drivers are cutting corners, your chances of being hit by someone who’s not carrying much (or any) car insurance are better than ever. “The person that gets hit is the one that’s going to be out of pocket for the big amounts,” Blum says. Bump your coverage up to at least $250,000—it probably won’t cost more than an additional $20 to $30 per year.
19. Save for college. You’ve probably seen a calculator indicating that you should be putting away some astronomical amount of money toward your child’s college education. It’s daunting. No lie. Your best bet? Ignore the calculator and put away what you can. If that’s $100 a month, then that’s what you save. Over 18 years, earning a 5 percent rate of return, you’ll still stockpile more than $30,000. It’s not going to cover four years of school, but it’s better than nothing. The sooner you start, the less you have to save each month, because your money has more time to grow. A tax-advantaged 529 plan is still one of the best places to put college savings. Find out how to open one here.
20. Visit a financial planner. Ask your friends for a recommendation or find one who charges by the hour and get objective financial advice from a professional. Got questions about your debt, budget, retirement, college, five-year plan, or investments? They’ve got answers. Use your payroll bonus to pay for it. It might be the best money you spend all year.