LETTERS From CAMP Rehoboth |
Early Spring Thoughts on Financial Planning |
by Alex Yearley |
Most people use tax time as a convenient point to think about longer term financial matters. That fits pretty logically because taxes do play a big part in financial planning. But just idle thoughts while fighting with IRS Form 1040 will not get you very far. Hold those thoughts until you have finished your taxes. Then sit down with a piece of paper and brainstorm. I would recommend that you start with a current inventory of your finances: both pluses and minuses (assets and liabilities). A lot of the information is still on the kitchen table if you have just finished your tax return. Use the paper and pencil. Write it all down, you may be surprised at what you find. Are the assets and liabilities in harmony? Are the assets increasing and the liabilities shrinking? Do you have too much cash on hand or in the bank? Could it work harder for you if invested or used to pay down credit cards? Are you using the equity in your home, assuming you own one? Interest on a home equity loan is usually deductible, credit card interest is not. After you have a grip on your financial picture, ask yourself how it can be improved. Are you taking everything offered by your employer? Far too many people fail to max out their 401K or 403B contributions. It would almost be impossible to find an investment better than a company match. Take advantage of it. If you have benefit choices, are you making the right ones? Look carefully at every benefit that is offered and see if it fits your situation. Though benefit changes are often made in the fall during "open enrollment," there is no harm in getting ready for those choices now. The next step is more fun. Ask yourself what you are saving for. Is it a new car or a larger home? Perhaps it is something less expensive like a vacation or next Christmas. Now is the time to weigh your savings goals with your current savings plans. Your impending tax refund might help here. It is pretty easy to determine how much you need to save. Just divide the goal by the number of months until it must be met. If you are putting aside less than the answer then it is time to reassess the goal, the savings plan, the time frame, or all or them. The final step should be a glance into the future. It is never too early to start your retirement planning. First be sure you know all about any retirement plans you may already have. Reread the company manual about the pension plan. Account for any IRAs picked up along the way. They are long term savings plans. Have you invested them using a long term strategy? You had to put them on your tax return, now is a good time to look. If you do not have any retirement plan started, there is no time like the present to start. Any banker, broker or financial planner would be happy to help you get started. There are plenty of ways to save for retirement, and you do not need a lot of money to get started. What you do need is a plan to get you there. This is an area where you should contact a professional. He or she will ask to see all the information mentioned above. They will work with it to find a plan that works for you. You cannot start this process too early but you can wait until it is too late. Make the wiser choice. For those lucky people with IRAs already in place, a new decision must be made in 1998. Do I convert to a Roth IRA or just leave the old deductible or non-deductible IRA alone? This should be addressed this year because of the special tax treatment. If IRAs are converted to Roth IRAs, taxes must be paid on all balances not previously taxed. For deductible IRAs that is the entire balance. For non-deductible IRAs it is the growth of the investment that is taxed. If conversion takes place in 1998, the applicable tax may be spread over four years. After this year, taxes on conversions will be due in the same tax year. There are good programs available to help with the conversion decision. If you are on-line visit www.rothira.com and do the analysis yourself, or consult your financial professional. The above exercises are not difficult. Anyone with the information at hand can do this in less than an hour. You will probably find it an hour well spent. Do not, however, forget to implement your plans or benefit changes. If all of this seems well beyond you, make an appointment with a financial planner and let them put you on track. What is important here is that you are thinking about your financial well being. Only you can get this ball rolling. Now is a good time to act. After all, who wants to do this stuff after the season begins? Alex Yearley, manager of the Rehoboth Beach office of Community Pride Financial Advisors, L.L.C., 39 Baltimore Ave., may be reached at (302) 227-2939. |
LETTERS From CAMP Rehoboth, Vol. 8, No. 2, March 13, 1998. |