Financial Do’s and Don’ts For the New Year

At the beginning of every new year, we always seem to promise we will exercise more, eat healthier and spend more time with our families. But another important New Year’s resolution is to keep your finances in top shape. Here are some dos and don’ts that may help you make the most of your money in 2003.

Don’t be afraid of retirement savings plans. If your company offers a 401(k), you should take advantage of it. Even if you can only afford to contribute a small percentage of your salary, the money you save will have the opportunity to compound over the years. Also, many employers match employee contributions to their 401(k) plans, which can help build your nest egg for retirement.

Do max out your IRA. IRAs aren’t just for retirement savings anymore. Keep in mind there are different benefits associated with different types of IRAs. With a Roth IRA, for example, you have the flexibility to withdraw the money you contribute to purchase a first home or for educational purposes. Even if you are participating in another retirement plan like a 401(k), you may still contribute funds to a Roth IRA and do so on an after-tax basis, meaning your distributions will be tax-free later in life. With a traditional IRA, your contributions may go into the account tax-deferred but you may be taxed when you begin taking distributions. Early IRA withdrawals can be subject to penalties, so be sure to consult with a financial or tax advisor before taking them.

Do start an emergency cash cushion. We hate to think about bad situations, but in case of a dire emergency you’ll probably need cash on hand. Keep in mind that while you can obtain cash by selling investments like stocks, it may take a couple of days to process the transaction. Therefore, if you were to need the cash on a weekend, you might be in trouble. As a result, it’s a good idea to keep about three months of your expenses in an account that can be accessed immediately.

Do plan ahead. Are you planning a summer vacation this year? Or would you like to buy a new car or computer? For any of these or other goals you might have for the year, start saving now. Develop a monthly plan where you set aside a certain amount of money every month to help you reach your goals. It’s a lot easier to save $100 per month for six months for a vacation than trying to fork out $600 all at once.

Don’t forget to review your financial portfolio. You should review your financial portfolio every year in order to adjust for any changes in your lifestyle. If you have recently had a baby, changed jobs or are planning to pay for a child’s college education, you may have to adjust your portfolio in order to reflect your new situation. It is important that your investments reflect your financial goals, risk tolerance and time horizon.

Don’t ignore your asset allocation. As you review your portfolio, make sure you don’t have all your eggs in one basket. It is important to check if your investments are properly diversified and have an appropriate mix of different investments that can help you meet your financial targets.