Common Sense Financial Tips

You don't have to be an expert to manage your money and prepare for life's unexpected twists and turns.

 

If you're like most people, your New Years Resolutions have expired. 

 

Chances are, your financial goals have fallen by the wayside too. I don't want to discourage you from paying down debt, saving a down payment for a house, or any of those big goals that you may have set for yourself at the beginning of the year. But if you sort of tuckered out on the big things (or even if you're still going strong -- go you!), maybe it's time to set some more achievable goals. Here are a few things you can do in an hour or less apiece to make yourself -- or your household -- more financially sound.

In no particular order.

  

If you die, someone is going to have to clean up the financial aftermath. Make it easy on them by putting everything in one place where they can find it. Dave Ramsey calls this a "Legacy Drawer," and suggests putting in a cover letter and letters to your loved ones as well as the financial papers. But we're trying to keep this under an hour, so the notes are optional. Here's what it should contain:

• Insurance papers.

• Loan documents.

• A list of every financial account: loans, bank accounts, investment accounts, 401(k)s, whatever. Security experts will kill me for saying this, but I'd say this list should have the account numbers, the PINs, and the passwords.

• Deeds and titles to any property you own (cars, land, etc).

• Birth certificate and social security card, if you have them.

• Information about your will/estate plans: who has them, who the executor is.

• Funeral instructions (if any; mine are "cheapest coffin you can find").

• Tax returns.

• A list of your major recurring expenses (so people know which bills to pay).

Start by putting this in a drawer; eventually, you should move this to a safe-deposit box, and tell whoever is likely to be taking care of your final details where to find the key. This should only take you an hour -- if it takes you longer than that, well, you really needed to get these documents while you could find them anyway.

  

If you're single, you don't need this unless you have a kid or someone else depending on you -- your job usually offers you enough to bury you. If you're married, I think you do need a little, even if you don't have kids. Married life is usually built on the expectation of two incomes: a mortgage (or lease), the cars, all sorts of other recurring expenses. At a minimum, make sure your spouse will have enough to bury you and pay off any outstanding debt -- including not only mortgages and cars, but credit cards and student loans in their name alone, if you own property. You don't want to have to hassle with someone coming after their half of the house or car to pay off their unsecured debt. Obviously, if your spouse is at home, or makes very little money, you're also going to want to replace some of your income.

You do not want "whole life" insurance, "return of premium" or any other product that promises you to give you some or all of your money back -- all this is is a savings vehicle with bad rates of return, bundled with expensive term life insurance. Buy a simple term life policy for 20 or 30 years -- long enough for you to accumulate enough assets to take care of your spouse if you die. You can compare rates, this shouldn't take you too long provided that you resist the blandishments of insurance agents who will attempt to up sell you "features" you don't need. Stand firm, buy term.

  

Remember when you thought you'd try Stamps.com? How about that credit monitoring service you signed up for eighteen months ago? The dual subscriptions to Netflix left over from before you moved in together? For many of you, I am sad to say, your gym membership also falls into this category.

Whatever it is, if you haven't used it in three months, cancel it. Cancel it whether or not you think you should be using it. You can always rejoin the gym after you've developed a burning desire to actually go. With the hundreds of dollars you will save between now and then, you will easily be able to afford any re-initiation fees.

  

Unless you are already at the maximum employer match, increase your 401(k) contribution by 1% of your income. Unless you are already pinching pennies so hard that Abraham Lincoln is actually screaming in pain, you can afford to put an extra 1% of your pre-tax income into your 401(k). Then every time you get a raise, you increase your contribution by another 1% until you hit the max. company match. Almost painless, and you'll feel a lot safer in retirement. If you are already there, give me a call for the next step.

 

If you don't have an emergency fund, this should be priority one. Here's how to do it so that you almost won't notice: set up an automatic transfer into your savings account from every paycheck. Figure out how much can you afford, but even if it's only $25, transfer it from every paycheck, and resolve not to touch that money unless it's an actual emergency. (Emergency: my car won't start. Not an emergency: I really need a break, so I'm going to the beach for a week.)

The ideal way to handle this is to have a separate account that isn't linked to your other bank accounts, and to have the transfer done as part of your auto-deposit. That way, you never see the money -- and I think you'll be surprised to find that you don't much miss it. But if you don't want to go to the trouble, you can do this with your regular savings account, as long as you're resolved not to touch the money in that account for anything but an emergency: just use online banking to do a recurring transfer on the same day as your paycheck hits the account.

Over time, increase the amount that you're saving. Eventually you'll have a tidy nest egg, and because the money was never in your checking account, you won't have been tempted to spend it on incidentals.

 

If you already have substantial assets, it's time to make sure they're correctly structured for your priorities. Are your mutual funds allocated the way that you want them, or over time, has one grown faster than the others, leaving your portfolio lopsided (many companies now automatically re-balance, but you should check.) You should also be thinking about your portfolio's life-cycle. If you're in your fifties, you should already be transitioning some of your money to bonds.

I know what you're going to say: you'll never be able to retire at those kinds of returns. Here is a piece of wisdom that I picked up from a driving instructor: "If you left late, you're going to get there late." Trying to flout that simple equation only gets you in trouble. Just as it's a bad idea to race through red lights in the hopes of making up the lost time, it's a bad idea to leave your assets in 100% equity because you're hoping that higher returns will still let you retire in comfort at 65. Risking destitution now is just compounding your earlier planning errors.

 

If your finances are pretty simple, you can do this in an hour with a questionaire, by mail, through a pre-paid legal service. If your finances are complicated -- well, OK, this won't take under an hour. But if your finances are complicated, and you have minor children, you really need a will. If it freaks you out too much to meditate upon your own death, pretend that you are preparing this will so you can drop out of sight and assume your new identity as Agent 007 of Her Majesty's Secret Service.

 

Are you looking forward to a nice big refund from the IRS each year? Don't look so happy -- that refund means that you made the government an interest-free loan for most of the year. And if you're like many freelancers, and you owe the government a hefty chunk, then you may be liable for interest and penalties.

The easy way to fix either problem is to adjust your withholding. HR can help you do this. If you're getting a big refund every year, raise your exemptions; if you're having to pay, lower them. (If they're already as low as they can get, look at what you owe this year, adjust for what you'll owe next year ... and start making estimated payments every quarter.)

 

Can you get a better interest rate on your credit cards? How about your bank accounts? You don't have to follow through, if you decide it's not worth it. But it's worth taking 15 minutes on the web to find out. Also worth doing: threaten to cancel your cable. You don't have to actually do it -- though with Netflix and Hulu and Amazon Prime's new subscription service, it's possibly worth it. But if you call to cancel, they'll usually offer you a better deal.