2 Half Days at work!

Thanks to the slow season and a nice boss we got 3x half days off of work. I am using one today and another tomorrow. This is allowing me to get some year end chores done around the house and rest a bit from work. He seems to thing Q1 2012 is going to be busy. I hope so!

Today I am starting the large project of a long overdue house cleaning. Time to purge and get ready for what the new year will bring. I also have some tax return calculations and planning, review my last year's goals and finances, and set concrete goals for 2012. Wow I need more than 2x half days!

I better get to work! I have a lot of ground to cover in the next few days.

Using Vacation as a Financial Reboot

I did a self-audit of my finances a little while ago and found that over the past year I have made some tracking mistakes. In total I spent more than my tracking systems say I did and I had to correct. This basically wiped out the quarterly bonus I got. Luckily I was not underwater.

The problem stems from my system of tracking expenses that are not directly in my budget. Items like car repairs, extra medical costs, and so on are hard to budget for. I use a spreadsheet to account for these against my remaining monthly budget. This lets me know how well I did overall.

It took me the past year to hammer out the details of how the system should operate. The problem came this past month when it appeared that my checking account balance would not cover all of my credit card balances. It gets complicated with work expenses thrown into the mix that are reimbursed. Turns out I forgot to transfer some money from my irregular bills savings account. Other than that it was simply bad record keeping in the beginning that caused the issue.

Now that I am leaving for Asia in a few days this will allow the dust to settle. I will be almost exclusively using cash while abroad. During this time my credit card balances will clear out and I will have a better picture of where I stand when I get back a month later. At this point I will start my monthly budget versus spending tracking over with good numbers. I am going to be much more attentive to the spreadsheet and tracking this time around!

Resuming Debt Snowball: Mortgage Paydown

I am in the process of evaluating how to proceed with my debt snowball strategy. I have crossed the line from consumer debt to "good" debt and have been debating on how to move forward. Here is my progress:

• Credit cards are paid off completely
• Emergency fund is now at the 3-month+ level
• Retirement savings is around 10% of my income
• I am making headway on lower goals

I have not paid extra on the student loans or mortgage thus far as their interest rates are quite low. They are fixed at 2.65% and 4.50% respectively. I know I can do better investing the money as opposed to paying it down faster and have done that thus far.

I have now decided that adding a little extra to my mortgage will help my overall goal of traveling more often. I want to own my house outright once I begin long term travel. I plan on adding an extra payment's worth of principal each year to know a few years off the life of the loan. This only amounts to another $30 per month that I have to pay. Well worth it for the lower expenses later!

I will start in June with the extra payments and go from there. It will certainly not put me into any sort of bind and I can still apply a lot to my other goals. It will be nice to see the day when I can say "I own my house outright and don't owe anything on it."

Your personal economy: what really matters to us!

These days there is a lot of talk about the economy, recession, depression, or whatever you want to call it. Some say it is improving and some say it is getting worse. It is all a matter of perspective. We are all affected by the economy as a whole. What really matters is how your economy is doing.

Your personal economy consists of:

• Your job/income
• Your net worth
• Your expenses
• Your ability to weather bad times
• How you are managing the above factors
  

You can have a surplus or shortage of any of the above. In this case we all want a surplus in all of them except expenses. If we have a shortage in any of them it affects our daily lives and what we focus on as we move forward in life.

Personally my "economy" is in a long recession since I am digging myself out of a lot of debt (surplus expenses). My job/income is OK for the moment and my net worth and ability to weather the bad times (emergency fund) are growing each month. I am on my way to recovery and hopefully growth!

There are many things that can cause a change in our personal economy. Here is a list of the major events that can make a big change positive or negative:

• Job Loss
• Raise
• Inheritance
• Buying a home
• Running up a credit card you cannot pay
• Having a child
• Getting Married
• Getting a second job
• Being frugal

The above list can go on forever. All the choices we make in our lives affect our personal economy in some form or fashion. Some will help us out financially in the long run while others will hurt us financially. It's a fact of life. The goal is to have more positives that negatives so we come out on top!

Doing an annual financial review is a good way to gauge your personal economy. Its a yearly "how am I doing" and "where am I going" exercise that we all should do. I find that tax season is the best since you are already digging into your finances from the past year anyway to file your return. Give yourself a personal economic checkup today!

Reminder: Adjust payroll exemptions!

It is a new tax year and if you overpaid or underpaid taxes last year now is the time to adjust your W-4 and state income tax withholding. In my case I overpaid slightly for both but I got a lot of tax credits this year which you have to file a return to receive.

When deciding whether or not to adjust you have to look at your real tax numbers and ignore credits. Credits come and go and change all of the time so they are not to be relied on. If you got no credits at all would your tax bill be covered?

Once you have the "real" number calculated you can adjust your payroll accordingly so you pay as close to the correct amount as possible. The goal is to get as close to a $0 refund as possible without owing money at tax time.

The New Year's Purge

Everyone talks about Spring cleaning. I tend to do my a bit early--In January. I like this time of year to sit down and do my annual financial review, clean out closets and cabinets, and simplify my life both financially and otherwise. It is good to start the year fresh and in control!

Here are a few things I look at each year:

• Reduce my stuff (clothes, electronics, furniture) by 25% or more by selling, donating, gifting.
• Shred sensitive documents no longer needed.
  
• Consolidate financial accounts.
  
• Close unused or dormant financial accounts.
• Scan important documents from past year to PDF and store safely.
• Roll accumulated coins and deposit to savings (or debt payment).
• Donate unwanted canned goods to food bank.
• Use up gift cards.

Above is just my base list. I find that as I go I discover more that I can do. The idea is to make life simpler and easier. Clutter causes stress and costs money. Having to manage too many financial accounts takes time and gives you more room for error. The idea here is to keep it simple and maintain a manageable lifestyle!

Personal Annual Financial Review Part 5: Estate Planning

Finally we will examine your estate documents. At a minimum everyone should have a will, living will, medical power of attorney, and financial power of attorney. These need to be kept up-to-date and an annual review of the documents makes sure your intentions are legally stated!

Will:

• Make sure all major assets are covered. This includes Home(s), car(s), investment accounts, bank accounts, etc.
• Make sure all listed assets are going to the people you want to have them in the event if your death.
• Make sure your will follows estate laws (attorney review is recommended for this!)
  

Living Will:

• Make sure the person you list as a decision maker to turn off life support in the case of extended coma or unconsciousness is still the person you want to have this power.

Medical Power of Attorney:

• Make sure the person listed on this document is correct.
• Make sure the powers given are explicit and clear.
  

Financial Power of Attorney:

• Make sure the person listed on this document is correct and is someone you trust with your money.

Investment and Bank Accounts:

• Check all beneficiaries on IRA accounts, trusts, employer retirement plans, pensions, and payable on death accounts. Make any changes you need to be sure your money is still going to the right people.

Estate Planning is the least fun part of managing finances. It is very important as you want to be sure your assets go to those that you actually want to have them. It makes things a lot easier for your loved ones in a very tough time.

Life Events that would cause you to change these documents:

• Marriage
• Divorce
• Death of a Spouse or Partner
• Death of other friends or family members
  
• Having/Adopting Children
• Changes in what your wishes are
  
• Buying or selling major assets such as real estate, collectibles, etc

Keeping your estate planning documents up to date does not take long. As always it is a good idea to seek professional help when making changes to be sure that everything is legally sound and will not give rise to a dispute in court. Reviewing them annually ensures your wishes are met!

Personal Annual Financial Review Part 4: Taxes

Next it is time to have a look at your taxes. Understanding and taking proactive steps will make sure you achieve the smallest tax burden possible. This part will cover Income and Property taxes. You will analyze each thoroughly to be sure you don't miss anything!

Income Taxes:

• Was enough withheld from your pay? Was too much withheld? Make adjustments to your w-4 and other documents at work if needed. Do this for federal, state (if applicable) and local taxes (if applicable). The idea is to have little or no tax refund if possible.
  
• IRA/401(k) contributions: Do you need to adjust the amount you deposit based on any change in tax laws or employer matching? Increasing these is a great way to reduce your tax burden!
• IRA Conversion: Depending on your income this year and your tax bracket it may make sense to convert some or all of you traditional IRA assets to a Roth IRA. It is best to consult a tax adviser about this if you are unsure in any way. It does pay off in the long term!
  
• Tax Credits: Are you eligible for any credits? Examples: First Time Home Buyer, education credits, foreign tax credits, and so on. This list is long so be sure to do some research or consult a professional so you don't miss any!
• Tax Deductions: Should you take standard deduction or itemize? Run your numbers both ways to compare. Common (non-itemized) Deductions: student loan interest, 50% of self employment taxes, medical bills over 7.5% of income, etc. This list can also be long and you should consult a tax adviser if you are not sure!
  
• Accuracy: Make SURE all of the tax documents (W-2, 1099, etc) are completely accurate. The documents you get are what the IRS gets as well so they need to be 100% right!
• Social Security Statement: Be sure to review this each year and that it matches what you actually earned. Call the number on the statement with questions or concerns. Inaccurate information can cause to to get a lower benefit!

Property Taxes:

• Carefully review your property tax bill for any changes. Make sure it is accurate!
• Did your amount increase or decrease? Why? Be sure to call and ask them questions if you are unsure about any adjustment.
• Exemptions: Most counties have a homestead exemption for your primary residence. Has this been filed and reflected on your bill? Do you have to refile it each year or is it permanent?
• If your change in property tax is large it may be worth to file an appeal and have it re-evaluated. If you and the county disagree on the value of your home it is worth getting a appraisal to support your case. Property tax appeals can be tedious but well worth the time!

Spending a couple of extra hours on your taxes and studying them can pay off. Be sure you get all deductions, credits, and advantages you are due. Make sure you are investing in the right kind of IRA account to get the most out of your money in retirement. Roth IRA's are almost always the best choice for those who qualify. Paying a little now to consult a tax adviser can really pay off for years to come. Use it as a learning experience that will pay for itself many times over!

Tune in next week for the final step in the Personal Annual Financial Review process (Part 5): Estate Planning!

Personal Annual Financial Review Part 3: Investments

Next it is time to have a look at your investments and retirement savings. This part will determine that you have invested your money correctly and are on track to reach your goals. It will cover asset allocation, retirement accounts, and taxable investments.

Asset Allocation:

• The first step is to evaluate your current target asset allocation. Is it performing as you expected? Are you able to tolerate the ups and downs in your portfolio?
• Based on the above questions you can make adjustments to your target asset allocation if needed. Example: Current: 80% stocks, 20% bonds. New Target: 70% stocks, 30% bonds.
• Once you have determined the correct target allocation it is time to re-balance your portfolio. If you have new or idle cash to invest use it first. Once that runs out do a Sell/Buy to bring it back to the target allocation if needed. Using cash first reduces transaction costs!
  

Retirement Accounts:

• Fees: Have a look at any fees you were charged over the past year. Is their any way to reduce or eliminate them? This includes changing brokers to a discount one such as Firstrade.
• Contributions: Are the amounts you deposit each month / quarter / year correct? Do you need to contribute more? Are you getting your full employer's match, if any?
• Tax Status: Does it make sense to switch to a Roth IRA from a Traditional or vice-versa? ( See Part 4 next week for more in depth tax information)
• Progress: Are you in line to meet your retirement target?
  

Taxable Investments:

• Fees: Have a look at any fees you were charged over the past year. Is their any way to reduce or eliminate them? This includes changing brokers to a discount one such as Firstrade.
• Shifting Assets: Are you maxing out your IRA contributions each year? If not, use assets from this account to fill the gap so you can get the tax benefits.
• Check your 1099 tax statements versus your actual activity to be sure it is accurate!

A yearly (minimum) review of your investments makes sure that you stay in line to meet your goals by maintaining your target asset allocation. Re-balancing forces you to sell high and buy low. Keeping an eye on account fees and knowing your options prevents wasting money and time. Tune in next week for Part 4: Taxes!

Personal Annual Financial Review: Part 2: Savings & Debt Analysis

Next it is time to have a look at your savings and debt. This is also known as your net worth. We will examine each separately starting with debt. This part of the review is to make sure that we are on track to get out of debt and reach our longer term goals. We grade ourselves on how we are doing and make adjustments to get there!

Debts:

• Credit Card: This is the top priority to pay off. It is generally the most expensive form of debt and can really hinder our financial progress. Now is the time to examine balances, minimum payments, and amount of credit card debt. Check your budget to see how much you have allotted to payments and attack the lowest balance first until they are all paid off!
• Auto Loans: These are loans in depreciating assets. If your credit cards are paid off this is the next one to accelerate payments on. It can be worse if you have an accident and the car is totaled and you are left with no car and a loan to pay. Pay as aggressively as you can to clear this debt off!
• Student Loans: A lot of us have had to borrow to cover the rising costs of a college education. Luckily for us the interest is tax deductible and usually pretty reasonable. These loans are an investment in yourself but would be good to pay off early. I would only pay more than the minimums here if you have adequate (6 month+) emergency funds saved already.
• Mortgages & Home Equity: These are loans against (usually) appreciating assets and are considered good debt. The main thing to examine here are your interest rates to see if it is worth it to refinance (more than 0.75% drop in rates). Only accelerate payments if you are nearing retirement age as you want this paid before you hang up your work gloves!

Savings:

• Emergency Fund: This is the most important savings you can have. I recommend having a minimum of 3 months of expenses saved. Others say 6 or even 9 months. This should be funded before any acceleration of debt payments including credit card debt. Paying more on your credit cards with no savings can get you right back into credit card debt again if an unexpected expense or job loss occurs.
• Bill Escrows: Make sure your irregular bills are covered using a savings account to accumulate money for when the bill is due. Examples: Property taxes, annual dues, car registration, or insurance premiums.
  
• Goals: If you are saving for a big ticket item such as a car, house, or dream vacation make sure you are putting enough into this account each month. This should also be covered in your budget review!
• Retirement savings and investments will be covered in Part 3.

One final note about savings: For your cash savings you need to shop around for interest rates. Compare your current rate with other banks to be sure you are maximizing your earnings. Bankrate.com is a great place to comparison shop. Open accounts and move your money if needed. Also make sure you are using the correct vehicle to reach your goal by using savings, money market, or CD's. CD's are great for longer term goals to earn more interest! Try to match the CD term to your goal time line.

Now that we have looked at everything it is time to see how we are doing! Calculate your net worth by adding up all your assets: Cash, Savings, Investments, House(s), car(s), and anything else of value that you have. Now subtract all outstanding debts from that amount. The result is your net worth. Those of us with a lot of debt may have a negative number. It is good to record this to compare in next year's review. It is a good gauge of how we are doing!

Next week I while show you how to review all of your investments. This is the most important step to stay on track for retirement and financial freedom!

Personal Annual Financial Review: Part 1: Budget

The yearly budget review is a great starting point for you annual financial review. You look at all of your real expenses over the past year and decide if you need to make any adjustments. This is where we usually find out if we eat out too much or were allocating too much money to our water bill. This step is critical!

Items examined in this section:

• Income: What are your sources of income and how much are they? Has their been any change in the past year that needs to be noted?
  
• Expenses: Look at the budget for your monthly expenses and also look at your actual payments for each. Also note any unexpected expenses and new ones not included in your budget.

Now that you have gathered all of the data for your budget it is time to make adjustments. Here are the key action items:

• Income: Total up your income and come up with a monthly figure. Insert it into your new budget. If you have side business or income note is separately for ease of accuracy and adjustment
• Expenses: Did you drop any expenses this year? Do you have any new ones to add? Adjust all numbers to reflect what you really need to cover them.
• Savings: Do you need to adjust the amount you move into savings up or down? Make this adjustment in your monthly budget as well.

Now you have adjusted your budget to reflect your current situation. The numbers do not have to be 100% accurate as they never will be! Rounding up is OK and is a best practice when creating your budget. Make any adjustments to automatic transfers as needed to cover the new amounts.

Tune in next week for Part 2: Savings & Debt Analysis!