A Few Quick Tips to Put Your Money on Track for 2009
Whether you like it or not, 2008 is coming to an end quickly. As the last few days of the year go by, we’ll soon be presented with a new year, and that means many people will be making resolutions and promises to improve their lives and finances in 2009. Even though January 1 is just another date on the calendar, there’s something about turning the page to a new year that provides some optimism and a renewed drive to set some goals.
Setting goals is the easy part. It’s sticking to your plan throughout the year that’s difficult. But let’s not worry about that. Instead, we’re going gto focus on just a few simple tips that you can implement for the new year that will make a significant impact on your life. This doesn’t mean you’ll suddenly be able to retire by this time next year or find yourself rolling around in a pile of money, but you will establish habits that will ensure you’re on your way to financial independence.
1. Create an Automatic Savings Plan
Pay yourself first. Yes, you’ve heard it a million times, and you’re probably sick of hearing it. As tiresome as that phrase is, it’s still important. The secret to saving isn’t so much paying yourself first as it is making it happen automatically. Think of how likely you are to save money every week if you had to go to the bank and actually make a deposit in person. On the other hand, imagine $50 coming directly out of your paycheck and going into your bank account every week. Are you going to even notice it?
So, if you don’t currently have an automatic savings plan, you need to create one for the new year. One easy way to do this is to simply contact your human resources department and get a direct deposit form. Most will allow you to create multiple deposits. So, you could have your direct deposit to save $50 per paycheck to go into your savings while the remainder goes into your regular checking. It’s simple, and effective.
If that isn’t an option, or you want a little more control, establish an automatic recurring online transfer from your primary account to your savings. With most banks this is very easy to set up, and in many cases, you can even transfer funds between banks which works out well if you have a high-yield savings account that isn’t at the same place as your primary bank.
By setting up this recurring automatic payment, you’ll painlessly stash away a little bit of your money without even realizing it. It doesn’t matter if it’s just $10 a week or $500 a week, but every little bit will go a long way in building up your emergency fund. You’ll be surprised at how much you have saved by the end of the year. And if you’re already doing this, use the new year as an excuse to increase how much you’re saving. Even a small amount makes a big difference over time.
2. Review Your W-4 Exemptions
With April still months away, taxes are probably the last thing on your mind, but this is a perfect opportunity to make an important decision. If you’re employed and have taxes automatically withheld, you can adjust how much is withheld from your paycheck with form W-4. If you have too much being withheld, you’re giving the government a free loan and have to wait until you get your tax refund to put it to work. On the other hand, if you’re having too little withheld, you’re stuck with a nasty surprise and will owe the IRS some money.
Ideally, you want to withhold enough so that you don’t owe any taxes at the end of the year while not withholding so much that you end up with a few thousand dollars in a refund. By getting your withholding as close to the sweet spot as possible, you’re putting more money in your pocket each paycheck that can be used to fund other goals while having enough set aside to fully pay your taxes.
You want to do this early in the year so the effects are minimized. If you have more or less coming out of your paycheck, the difference will be much smaller if it’s spread out across 52 weeks as opposed to making the change somewhere down the road where you have less time to make up the difference. Learn more about how to calculate your W-4 exemptions.
3. Take Full Advantage of Your Retirement Savings
For most of us, retirement is one of the biggest financial goals out on the horizon. Whether it’s just a few years off, or a few decades, the earlier you make the right moves, the better off you’ll be. More important than how you invest is how much you invest. If you take part in an employer-sponsored option like a 401(k) or 403(b), you have the benefit of using pre-tax dollars. That means you’re receiving an immediate benefit when it comes to taxes. Another added bonus is that the maximum contribution limit is as high as $16,500 in 2009. That is a decent amount of money that can not only accelerate your retirement savings, but it will take a big chunk out of your tax bill. If you are considering maximizing your contributions for 2009, it comes out to about $317 per week, or about $635 every two weeks. Again, it’s easier to reach these limits when you spread it out across the whole year.
If you don’t have an employer plan, you still have a few options to help you get ahead. If you like the idea of pre-tax savings, a Traditional IRA is going to be a good bet. You can generally stash away up to $5,000 for 2009. If taxes aren’t a concern right now and you’re looking for tax-free growth, you have the Roth IRA assuming you qualify. There are income limits still in effect for 2009. To reach the $5,000 limit, it comes out to $96 per week, or roughly $192 every two weeks.
So, for 2009, you want to make sure you’re doing as much as you can. Even if you can’t max out your contributions, every dollar helps. If you’re taking advantage of your employer’s plan, you already have the benefit of making it automatic right through payroll. If you’re on your own with an IRA, then it’s up to you to create an automatic contribution. Again, if you make it automatic, you’re putting your savings on autopilot and will hardly know the money is missing. And if you’re already doing this, great. But use this time to increase your contributions.
4. Establishing a Suitable Investment Portfolio
If you’re like most, 2008 was a pretty bad year for your investments. In many cases, you might be down anywhere from 30-50% this year. This has a lot of people second guessing their investment strategy, and even worse, causing people to get out of the market completely. While I can’t telll you how you should be investing, you should at least use this time to make sure you’re on track for the new year. This may mean making some changes, or it might mean leaving things alone. Either way, you need to know where you stand, and what role each investment plays in your portfolio.
If you’re unsure of where to start, look for a simplified approach. If your retirement plan at work doesn’t have a lot of options, or funds with high fees, try to stick with an index fund or two. If that isn’t an option, look to see if they offer any lifecycle or target date funds. These funds are usually pre-allocated in a way that’s suitable for your age or risk tolerance. While they may carry a slightly higher fee than an index fund, it can simplify your finances while easily giving you some basic diversification.
Beyond that, if you’re investing on your own, now is a good time to review your funds and see if there are any changes to be made. The fallout from this economic downturn has created a number of problems. Fund mangers have been fired, long-term winners are now big losers, and even fund expenses may have gone up. So, make sure you’re aware of any changes your funds may have undergone, and verify that those funds are still suitable for your investment objectives. In many cases there will be no changes needed, but a quick review will make sure that is the case.
5. Review Your Budget
Whether you follow a detailed budget or not, the new year is a perfect time to analyze your expenses and how you spend your money. If it’s been a while since you’ve looked at your budget, a lot of things may have changed. An increase or decrease in pay, a new child, added expenses, fewer expenses, and so on. These changes can significantly impact your spending, so the sooner you adjust for them, the better.
So, sit down and do a quick analysis of your expenses. You’ll still have most of your fixed expenses on items such as housing, insurance, etc. But where you want to focus your efforts is on flexible expenses. Food, entertainment, repaying debt, and hobbies are places you can make the biggest impact. Cutting back on a few nights of eating out, getting rid of a magazine subscription, or even shaving a few dollars off of your entertainment can go a long away. Again, it goes back to making small changes that are spread out over the course of a year. Saving $30 a month on food doesn’t sound like much, but if you do that throughout the year, you’d have nearly $400 that could have gone into your emergency fund, retirement account, or applied to credit card debt.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.
Great list of financial tips. I agree completely with all of them and this is the perfect time to ensure you finances are in good shape. I really like you tip alot on making sure to take advantage of retirement plans like your company's match on 401k's and IRAs.
@BankerBryan and @Jeremy
Thanks for putting it into a different perspective I wasn't thinking about. I can see how taking that extra little money each month and directly putting it into savings, I was going to wait for the one larger refund and place all of that in savings. In a ways I plan on using it for mental reasons as well. Everyone likes getting presents, or money. Even an expected refund is still unexpected income that you don't plan, may help me budget better during the time. Although for next year I may start to switch methods.
You're right, the base limit is still $5,000. I work with a lot of 50+ folks so I get in the habit of just saying 6k. I updated the post to reflect the current numbers.
Good point, Michael. And to address your first comment, that's another great observation. I guess the bottom line is that by implementing the right strategies up front, you can reach a point where you don't have to worry about spending money on the things you enjoy.
Furthermore, if you have any debt (especially high-interest credit card debt), the amount you're forfeiting by over-withholding is actually the top interest rate you're paying - not just the rate you could get from a savings account.
Craig, like Bryan said, that added cash flow by only withholding just enough for taxes can be put to work immediately rather than sitting in the IRS coffers for a year or more until you get it back. True, it might not amount to much, but even $50-$100/month extra can immediately be used to go into a high-interest savings account or as IRA contributions.
I know that some people over-withhold as a way of forced savings, and I guess that works for some. But if you have the discipline to use the money that would otherwise be going towards overpaying your taxes and put it to work on your own, it is a far better option.
These are some great tips. I especially like that Automatic Savings Plans are at the top - it takes some getting used to but if you can pull it off eventually you forget about it and you are able to save.
@Craig - I try to limit my withholding to only the amount that I will have to pay in taxes for two reasons. One, you don't earn interest on the money while it's sitting in the IRS's hands and Two - The IRS is earning interest off of my money while it's in their hands. I'm already paying taxes I don't want to give them any more.
I was under the impression you want to with hold as much money as possible, especially if you can afford it. The extra minimal money you would receive each check isn't noticeable if it's not there. When you get the tax refund though, it'll be like receiving a surprise bonus where you can do whatever you like with that.
Great ideas for 2009, Jeremy.
I'd add "Spend comfortably on things you value you highly" to the list. If people listen to your advice and implement your five tips, they ought to be able to comfortably "splurge" on something for themselves too.
I love to save as much as the next PF blogger, but every once in a while, it's important to remember why it was that you previously saved your money.