The only way to achieve financial security is to monitor your tax and financial affairs throughout the year. And what better way to kick off the new year than to tidy up your financial and tax house. Here are some tips to get you started.
Take control of your credit cards. Over-reliance on credit cards hurts you in several ways. With interest rates typically in double digits, it’s the most expensive way to borrow money. Think of those monthly interest payments as draining off dollars that you could be investing in a home or saving for your retirement. And too much debt can hurt your credit score and make other borrowing more difficult. It takes time and discipline to reduce credit card debt, but it’s well worth the effort.
Rid yourself of “stuff” you don’t use. Are you paying for a cell phone you rarely use? A magazine you never read? A mail-order video service you forgot about? An extra cable box for that basement TV you never watch? A membership to a gym you rarely attend? If so, now is the time to dump those wasted services and pocket the cash.
Build a cash reserve for emergencies. Your financial situation can quickly spin out of control if you can’t come up with cash when you need it. If you lose your job, you might have to live on reduced income for several months. Or there could be unplanned medical bills, car repairs, or home repair costs. Even if you have insurance, reimbursements can take time and there are deductibles to meet. Work hard to put aside at least three months’ living expenses. Invest it in a safe, liquid account, and resist the temptation to raid it for non-emergencies.
Save regularly and save smartly. Develop the habit of saving something every month, no matter how small the amount. The earlier you start, the longer your savings will have to compound for retirement. Save as intelligently as possible. If you have a 401(k) plan that your employer matches, that’s probably the best investment you’ll find. Other tax-advantaged plans usually make sense, especially for younger investors. But developing a regular savings habit is the key.
Diversify your investments. You’ll reduce your risk by spreading investments among stocks, bonds, and real estate. Within each category, diversify among different industries and companies. The worst thing you can do is to have everything tied up in stock of the company you work for.
Identify your tax opportunities for 2012. There are many credits and deductions available to you in such areas as retirement, education, home ownership, and child care. Identify those that will reduce your taxes, and make adjustments as needed to qualify for those tax breaks.
Get that new filing system started now. Purge your old files. Destroy documents that you don’t need. Create new files for your 2012 documents. Keep a tax and financial calendar that shows all deadlines for making payments and filing returns. And if you don’t have a filing system, create one in order to organize and locate your tax and financial records.
Educate yourself about financial matters. You don’t have to get a degree in finance, but read financial articles on topics that concern your affairs. Consider taking a seminar in basic investing. Ask questions of your advisors. The more you know about finance, the more you can take control of your own financial health.
A whirlwind of regulatory changes are coming in 2012 for 401(k) plans. If you are a plan sponsor (employer), you should consider the following action items to make sure you stay up to date and are fulfilling your fiduciary responsibilities to the plan.
Benchmark Your Plan - ERISA requires the plan sponsor, as a fiduciary, to ensure that plan expenses for participants are reasonable. The best way to document your fulfillment of this obligation is to have an independent third party prepare a benchmarking study. The study should include a comparison of all fees, investment diversification and performance parameters (contribution rates, participation rate, utilization rate etc.) to those of similar plans based on total assets, number of participants, average account size and industry.
Review Your Plan’s Investment Policy - An effective written investment policy can go a long way toward avoiding plan sponsor ERISA liability. An effective investment plan should detail how the plan’s investments are chosen (diversification, performance, cost etc.) and how often they are reviewed and the review procedure.
Prepare for the U.S. Dept. of Labor’s New Regulation on Participant Fee Disclosure - Even though the regulation stipulates that the Plan Administrator (employer) is responsible for compliance, realistically the plan record keeper is going to have to provide this data to plan participants. Ask your record keeper to provide you, in writing, with details of how your plan will comply. Get estimates of what your employees will see on those disclosures and be prepared for their questions. Many will be surprised that there are any costs associated with their 401(k).
Review Your Fiduciary Risk Exposure from Your 401(k) Plan - ERISA bestows on the plan sponsor a fiduciary duty to act in the best interests of the plans participants and to see that the plan is operated for their sole benefit. Many plan providers and consultants provide a fiduciary checklist to help you spot weaknesses and deficiencies in plan operations, investments and investment advice. Many times these checklists are free and can save you a lot of headaches should DOL drop by for a plan audit.
Talk To Your Employees about Your Plan - Face it, ERISA lawsuits are initiated by unhappy participants. Are your employees happy with your 401(k) plan? Is it the benefit it was intended to be? What are your employees’ experiences like when they seek advice and guidance? Is your plan focused on positive outcomes, i.e. successful retirements?
Shop Your Plan - The 401(k) landscape is changing rapidly due to increased regulation, competitive pressure and litigation. The positive side to this is that costs are being driven down and both the availability and quality of investment advice are increasing. It has never been more possible to obtain a better deal, both for you and for your employees.
We have free resources available to help you analyze and benchmark your 401(k) plan and review your fiduciary risk exposure. We can help guide you through the tasks above to ensure that you are protecting both yourself and your employees. Contact us at email@example.com