Start, or boost, your emergency savings account.
The biggest barrier to saving is not being in the habit of saving. The best way to get in the habit is to pay yourself first by directly depositing money from your paycheck into a dedicated savings account. This can be done concurrently with your goals of paying down debt or saving for retirement. You won't miss what you don't see, and putting your savings on autopilot is a great way to reinforce your money saving habit when unplanned expenses inevitably come along. Tip 2Get a high-yield savings account. Once you've started to save, you'll need a place to put that money. There are three requirements in determining where to put your rainy-day fund: It must be liquid (meaning you can get to the money whenever you need it), it must be free of investment risk and you must earn a return that preserves your buying power against the erosive effect of inflation. An FDIC-insured, high-yield savings account meets all three of these requirements. Tip 3Find a free checking account. Having the wrong checking account can take hundreds of hard-earned dollars out of your pocket every year. The average interest-bearing checking account charges a monthly service fee of $12.55 and requires a balance of more than $3,300 at a near zero rate of interest to avoid fees. Instead, look for one of the many accounts that charge no monthly service or per-transaction fees, and don't require a minimum balance. These free checking accounts have long been the hallmark of smaller community banks, credit unions and online banks. Track your monthly spending. People hate to use the "B" word -- budgeting. Call it what you want, but you do need to get a handle on your spending. Doing so does two things: It helps you determine where you can cut back and helps maximize your money-saving efforts. Begin by tracking your spending for two months. Then use that information to build a realistic monthly spending plan. Finally, track all of your monthly expenses. At month's end, tally your spending against the plan and see where you did well and where you didn't. Pay down high interest credit cards. For many households, the best return on your money is to pay down credit card debt. Whether carrying balances at 12 percent or 22 percent, credit card debt is typically the costliest debt households have. Plowing excess cash into repayment of credit card debt is a double-digit, risk-free return because it reduces the outstanding balance and the resulting interest charges. This is a sound move now as credit card rates will only move higher over the next two years. Tip 6Begin or increase contributions to a workplace retirement program. While many employers have scaled back or suspended their matching contributions to workplace retirement plans, such as 401(k)s, this is not an excuse to suspend your own. Even if your employer is contributing at a reduced rate, it still represents free money. If they're not, the burden is on your shoulders. Contributions not only reduce your taxable income now, but your investment goes to work immediately and grows without the headwind of taxes. The regular contributions made with each paycheck represent the best example of dollar-cost averaging, buying fewer shares when values are high but more shares when prices fall. Another avenue is a Roth 401(k), in which your contributions are made with after-tax dollars but withdrawals in retirement will not be taxed, allowing you to keep your entire nest egg. Tip 7Make an IRA contribution. If you or your spouse has earned income, you are eligible to contribute to an individual retirement account. Those under age 50 can contribute a maximum of $5,000 and those 50 and older can contribute up to $6,000. You can open an IRA with a bank, credit union, brokerage firm or mutual fund, and invest the contributions as you choose. With an IRA, you can choose investments that aren't available in your workplace retirement plan, such as commodities, individual stocks or certificates of deposit, giving you access to investment options that result in a more diversified portfolio. A traditional IRA offers tax-deferred growth, while a Roth IRA offers tax free growth of retirement savings. Convert traditional IRA to a Roth IRA. The new year brings an attractive new opportunity. While the income limits restricting contributions to a Roth IRA remain, the income limit restricting eligibility to convert a traditional to a Roth IRA disappears. This means anyone wanting to convert some or all of their traditional IRA into a Roth can do so, regardless of income. It also means doing it in 2010 is especially appealing because the resulting taxes can be spread over 2011 and 2012. Even though the income limit on Roth contributions remains, you can contribute to a traditional IRA then immediately convert that traditional to a Roth IRA. This is a roundabout way of financing a Roth IRA, even if your income is too high to do so in a direct way. As for the tax bill that results when converting a traditional IRA to a Roth IRA, it is vitally important to pay the taxes out of other assets, not your retirement assets. Save that money for your retirement.
Tip 9Refinance into a fixed-rate mortgage. Interest rates are at record lows, and eventually they will move higher, much higher. When that happens, the home financing place not to be is in an adjustable-rate mortgage that is subject to a rate reset. Fortunately, this is entirely avoidable. Refinance out of an adjustable-rate mortgage and lock in a fixed rate while they are near record lows. Do this even if your adjustable rate mortgage won't reset for another year. Yes, you may trade away another year at 3.5 percent to 4 percent, but you permanently insulate yourself from the inevitable scenario of higher interest rates. Homeowners who are upside down and can refinance through the Home Affordable Refinancing Program, or HARP, should move quickly to refinance as that program is scheduled to expire in June 2010.
Tip 10 Rebalance your investments. Many investments have rebounded from their depths in March 2009, with the stock market up by more than 60 percent. Commodities, too, particularly gold and energy, have turned in strong performances. In other words, your portfolio may look much different than it did during the March lows. Such outsized performance by some asset classes can distort your asset allocation widely from its intended target. So rebalancing your investments back in line with your goals and risk tolerance is prudent. This also helps reduce the susceptibility of your portfolio to sharp market corrections. Rebalancing is a good habit to undertake, but it is particularly important following a year of huge swings as we've seen in 2009.
The biggest barrier to saving is not being in the habit of saving. The best way to get in the habit is to pay yourself first by directly depositing money from your paycheck into a dedicated savings account. This can be done concurrently with your goals of paying down debt or saving for retirement. You won't miss what you don't see, and putting your savings on autopilot is a great way to reinforce your money saving habit when unplanned expenses inevitably come along. Tip 2Get a high-yield savings account. Once you've started to save, you'll need a place to put that money. There are three requirements in determining where to put your rainy-day fund: It must be liquid (meaning you can get to the money whenever you need it), it must be free of investment risk and you must earn a return that preserves your buying power against the erosive effect of inflation. An FDIC-insured, high-yield savings account meets all three of these requirements. Tip 3Find a free checking account. Having the wrong checking account can take hundreds of hard-earned dollars out of your pocket every year. The average interest-bearing checking account charges a monthly service fee of $12.55 and requires a balance of more than $3,300 at a near zero rate of interest to avoid fees. Instead, look for one of the many accounts that charge no monthly service or per-transaction fees, and don't require a minimum balance. These free checking accounts have long been the hallmark of smaller community banks, credit unions and online banks. Track your monthly spending. People hate to use the "B" word -- budgeting. Call it what you want, but you do need to get a handle on your spending. Doing so does two things: It helps you determine where you can cut back and helps maximize your money-saving efforts. Begin by tracking your spending for two months. Then use that information to build a realistic monthly spending plan. Finally, track all of your monthly expenses. At month's end, tally your spending against the plan and see where you did well and where you didn't. Pay down high interest credit cards. For many households, the best return on your money is to pay down credit card debt. Whether carrying balances at 12 percent or 22 percent, credit card debt is typically the costliest debt households have. Plowing excess cash into repayment of credit card debt is a double-digit, risk-free return because it reduces the outstanding balance and the resulting interest charges. This is a sound move now as credit card rates will only move higher over the next two years. Tip 6Begin or increase contributions to a workplace retirement program. While many employers have scaled back or suspended their matching contributions to workplace retirement plans, such as 401(k)s, this is not an excuse to suspend your own. Even if your employer is contributing at a reduced rate, it still represents free money. If they're not, the burden is on your shoulders. Contributions not only reduce your taxable income now, but your investment goes to work immediately and grows without the headwind of taxes. The regular contributions made with each paycheck represent the best example of dollar-cost averaging, buying fewer shares when values are high but more shares when prices fall. Another avenue is a Roth 401(k), in which your contributions are made with after-tax dollars but withdrawals in retirement will not be taxed, allowing you to keep your entire nest egg. Tip 7Make an IRA contribution. If you or your spouse has earned income, you are eligible to contribute to an individual retirement account. Those under age 50 can contribute a maximum of $5,000 and those 50 and older can contribute up to $6,000. You can open an IRA with a bank, credit union, brokerage firm or mutual fund, and invest the contributions as you choose. With an IRA, you can choose investments that aren't available in your workplace retirement plan, such as commodities, individual stocks or certificates of deposit, giving you access to investment options that result in a more diversified portfolio. A traditional IRA offers tax-deferred growth, while a Roth IRA offers tax free growth of retirement savings. Convert traditional IRA to a Roth IRA. The new year brings an attractive new opportunity. While the income limits restricting contributions to a Roth IRA remain, the income limit restricting eligibility to convert a traditional to a Roth IRA disappears. This means anyone wanting to convert some or all of their traditional IRA into a Roth can do so, regardless of income. It also means doing it in 2010 is especially appealing because the resulting taxes can be spread over 2011 and 2012. Even though the income limit on Roth contributions remains, you can contribute to a traditional IRA then immediately convert that traditional to a Roth IRA. This is a roundabout way of financing a Roth IRA, even if your income is too high to do so in a direct way. As for the tax bill that results when converting a traditional IRA to a Roth IRA, it is vitally important to pay the taxes out of other assets, not your retirement assets. Save that money for your retirement.
Tip 9Refinance into a fixed-rate mortgage. Interest rates are at record lows, and eventually they will move higher, much higher. When that happens, the home financing place not to be is in an adjustable-rate mortgage that is subject to a rate reset. Fortunately, this is entirely avoidable. Refinance out of an adjustable-rate mortgage and lock in a fixed rate while they are near record lows. Do this even if your adjustable rate mortgage won't reset for another year. Yes, you may trade away another year at 3.5 percent to 4 percent, but you permanently insulate yourself from the inevitable scenario of higher interest rates. Homeowners who are upside down and can refinance through the Home Affordable Refinancing Program, or HARP, should move quickly to refinance as that program is scheduled to expire in June 2010.
Tip 10 Rebalance your investments. Many investments have rebounded from their depths in March 2009, with the stock market up by more than 60 percent. Commodities, too, particularly gold and energy, have turned in strong performances. In other words, your portfolio may look much different than it did during the March lows. Such outsized performance by some asset classes can distort your asset allocation widely from its intended target. So rebalancing your investments back in line with your goals and risk tolerance is prudent. This also helps reduce the susceptibility of your portfolio to sharp market corrections. Rebalancing is a good habit to undertake, but it is particularly important following a year of huge swings as we've seen in 2009.
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