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Resolutions for the New Year
Meet With Advisers Early, Keep Good Records of Expenses
January marks the beginning of a new year and is the time when many of us make resolutions of what we hope to accomplish. Often these resolutions are made and then broken during the first month.
This year, we suggest you make some financial resolutions that you’ll keep and will have some long-term positive results. Here are a few ideas we had for the new year:
Resolution No. 1: Organize Your Year-End Statements
As a first step, accumulate and organize the year-end financial statements for your mortgages, investments, bank accounts and retirement assets you receive in January. Review these statements to make sure you have them all. If you’re missing any, now is the time to call or write to obtain these statements before the April tax return rush.
We recommend making a copy of these year-end statements. One set, which you’ll use to prepare your tax return, goes into manila file folders labeled by category. (Typical folders would be labeled “Charitable Contributions,” “1099s,” “IRA Statements,” etc.) Everyone has his or her own filing system, but we’ve found the three-ring binder to be a useful tool. If you like this approach, we would file the other set of year-end statements into the binder divided by the title of the account (examples would be “401(k),” “Pension Plan,” “IRA” and “Mortgage”). This binder would be labeled for the past year. If the annual statement includes cumulative information for the year, take this opportunity to throw out any interim statements you received during the past year.
At the same time, you could set up a new investment binder for the coming year with dividers for each account so that it will be easy to put statements into this binder during the year.
Resolution No. 2: Make an Appointment to See Your Accountant Sooner Rather Than Later
As soon as you have organized your year-end statements, make an appointment to meet with your accountant. The sooner you can see your accountant in the new year, the better the advice this professional can give you.
If you want to prepare your own return, rather than doing it manually, we strongly recommend using one of the tax-preparation software programs that are available — they get better every year.
Unless your return is very simple, we recommend using an accountant who may point out something you missed. Whichever approach you choose, start now to get together your tax-related information.
Resolution No. 3: Prepare a Year-End Financial Statement
Now that you have organized your year-end financial statements, you should put together a year-end financial statement. In the binder, you filed your assets by account. For your financial statement, you take the same information but divide it differently.
Divide your assets into personal and retirement assets and then list them by type of assets. The three broad asset categories would be “Cash,” “Investments” and “Fixed Assets.”
Cash would include those accounts that are liquid or will be liquid within a year. These would include checking accounts, savings accounts, money markets, certificates of deposit, etc.
Investments is self-explanatory. If you own any of your assets jointly with another person or if you have a trust, you should indicate ownership of each asset.
Fixed assets includes the property that would be nonincome-producing, such as your home, cars and personal effects.
After listing your assets, you should list current liabilities such as the current amount owed on your mortgage, car loans and credit card debt.
If you subtract your liabilities from your assets, then you know your net worth. This number is helpful so that you can see where you are now, but it’s even more interesting if you keep a historical record each year so that you can see any progress you might have made.
Resolution No. 4: Review Your Asset Allocation
Now that you’ve listed broad categories on your financial statement, we recommend you focus on the investment portion. Figure out what percentage of your investments are in cash, fixed income, U.S. stocks, international stocks and other investments (real estate other than your home, nontraded REITS, etc.).
You might want to divide the U.S. stock category further into large-, mid- and small-capitalization stocks. You also may want to put global and international stocks together but subdivide them between established and emerging countries.
The purpose of reviewing your asset allocation is to make sure a particular asset category hasn’t gotten too large or small during the year. The appropriate asset allocation for each person depends on his or her particular circumstances.
Now that you’re so well-organized, you should make an appointment to see your financial adviser to determine whether any changes are recommended to better achieve your investment goals in the coming year.
Resolution No. 5: Keep Good Financial Records All Year
Most of these resolutions refer to
action you can take in the early part of the new year. But we suggest you continue to keep your records during the rest of the year. Each month, set aside some time to keep your financial records up to date. Quarterly, assess what your assets are worth.
Computing your capital gains and losses at the end of each year will be a lot easier if you keep a running record of your costs for assets as well as for reinvested capital gains and dividends. You can keep this manually or use a computer program for this purpose.
Resolution No. 6: Keep Track of Your Expenses During the Year
When it comes to expenses, we find that clients fall into one of two categories. They either know where every dollar goes or they have no idea how they spend their money. If you really want to be in control of your financial life, you should know how you spend your income. The new year is a great time to start keeping track.
As long as you’re setting up binders, you might add another binder that would include your monthly expenditures. In it you could put all your bills for regularly occurring expenses as well as periodic expenses. This would include many items, such as electricity, water, real estate taxes, insurance as well as home maintenance/improvement costs.
Of course, another alternative would be to keep a record of those expenses in a software program such as Quicken. This program can divide your expenses between tax-deductible and nondeductible ones so that at year-end, all you have to do is push a button to see a complete record of how you spent your money as well as a record of the year’s tax deductions.
Your goal is to have a handle on how much you spend. After you keep a record for a few months, you may be amazed to find where your money is actually going!
Resolution No. 7: Build/Maintain an Emergency Cash Reserve
You might know what your expenses are, but every budget is faced with those unexpected events that cost money, such as a roof or furnace that needs to be replaced, a car that breaks down or the family member who needs some financial help. Over the years, financial planners have recommended that people keep a cash reserve equal to three to six months of expenses to cover these expenses without having to sell something in a depressed market. Many thought this was too much to keep liquid, but those who had this reserve during 2008 and early 2009 were very glad to have this cash cushion.
We recommend that if you have a cash reserve, keep it. If you don’t have one, start building it now, adding to it each month.
We hope you’ll make and keep all your New Year’s resolutions, but the ones we have suggested are pretty easy to keep and will help you control your financial future.
Alexandra Armstrong is co-author of the fourth edition of On Your Own: A Widow’s Passage to Emotional and Financial Well-Being. She is a Certified Financial Planner practitioner and chairman of Armstrong, Fleming & Moore, Inc., a registered investment advisory firm in Washington, D.C. Securities are offered through Commonwealth Financial Network, member FINRA/SIPC. Investment advisory services are offered through Armstrong, Fleming & Moore, Inc., an SEC-registered investment adviser not affiliated with Commonwealth Financial Network.
Karen Preysnar, Certified Financial Planner practitioner, co-author of this article, is vice president in charge of financial planning at Armstrong, Fleming & Moore, Inc., and a registered representative with Commonwealth Financial Network.
Individuals should contact a financial planner, tax adviser or attorney when considering these issues. Commonwealth Financial Network does not give tax or legal advice. Consult your personal adviser before making any decisions. The authors cannot answer individual inquiries, but they welcome suggestions for article topics.