The end of the year is my time to review my finances. While I’m not a personal finance expert, I am responsible for my personal financial decisions that I make during the course of the year. In order to get perspective — and not get burned — I take this week to do my personal financial maintenance objectives for the following year.
Here are the five areas I look at:
Paying outrageous interest rates — even when you have perfect credit — is just throwing money at banking executive bonuses. When banks are getting money at zero percent and you are paying 13.99% or higher interest on your credit cards, it is a good profit — for the banks. You carry all the risks for your credit rating if you don’t pay on time and they make mafia-like profits. What could be better?
Now, you might not get everything to zero in a year. But you should decide which debts you have to get to zero so that your focus starts out right in the new year.
In case you didn’t notice, it is taking a LOT longer to find a job in this jobless recovery. And the risk of layoffs is still very high. The only buffer you have is the savings you have stored away for the layoff day.
I have consistently recommended having one years take-home pay in a savings or liquid investment account. This includes whatever you contribute to your 401(k) account as part of take-home pay as you will need COBRA if you get laid off and the 401(k) amount could equal a great amount of the COBRA payment.
One years take-home pay sounds like a lot. And it takes discipline to get there. But if you get laid off, one years take-home pay keeps desperation away. Obviously, you can’t get one years take-home pay in the bank in one year. So figure out what you can do to get you further along the savings path.
Retirement contributions are great over time. The key is…over time. If you don’t contribute anything to a retirement account when you are on your first job, you don’t get to use the greatest amount of time to compound your investment. Pensions, you can assume, are a thing of the past so all of your retirement will come from your savings, with company matches, plus your investment actions.
If you are not at the company match level, shoot for that first. If you are, figure out what it would take to max out your contribution and make the next step to get there.
If you are fortunate enough to get a raise for 2010, consider just moving it right into the investments in your 401(k). It could be the difference to getting you to your next level.
Some 401(k) plans match company funds with company stock. ESOP’s allow you to buy company stock at a discount. Bonus plans pay you in vested stock options or restricted stock that vest over the course of three years. Before you know it, half your retirement or other savings are in your company stock — a huge risk.
Now, I really thought after Enron went down the tubes — taking along their employee’s retirement dollars with it — that no one would have too much company stock in their portfolios.
I was wrong.
I personally know far too many people who had all their retirement savings in Washington Mutual stock and watched the stock go from $42 a share all the way down to 16 cents a share. Tens of thousands of dollars, in some cases hundreds of thousands of dollars, gone. You cannot make that amount of money back in any reasonable time. Having too much company stock is just asking for financial trouble, especially given how many companies are going belly up in this recession.
I personally never had any company stock in my 401(k). I sold the restricted stock I had whenever it vested. The same thing with ESOP stock holdings; the minute I could, I sold it and took the difference in the lower buy price to the current price. That position is a bit extreme, but people think they know what is really happening in their company and hold on to company stock way too long when the truth of the matter is they really don’t.
Traditional investment advice will tell you that you can’t be a day trader and still hold another full-time job. I’d agree with that. Traditional investment advice also says you should have a diversified portfolio to balance risk in your investments (which failed miserably with the free-fall stock market of 2008 to 2009…).
But you can’t hold all your marbles in one investment device. So this is the time I reallocate the percentages of my dollars going into the 401(k) investments to the various funds offered. Want to have money going to your developing nation fund? What is the percentage you want? How about the percentages going to large cap funds?
This week is where I decide the major changes to these funds for the coming year.
The biggest investment engine you have is your ability to produce work for pay. But having a secure job is an oxymoron. There are no more secure jobs, just work to be done. If we are going to become Cubicle Warriors, we need to get our personal finances right so that the times between work allow you to make the right decision about the next job to take. These five steps get you going in the right direction.
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