January 2011

JANUARY 2011: What You Need To Know About - Getting Your Finances In Order

Author: Lew Wessel | Photographer: Photography by Anne

I’m one of those people who actually make New Year’s Resolutions, compiling a short list each January of things I want to achieve in the coming year.

These resolutions range from the usual physical fitness and financial stuff to “I want to be a better me” goals. They all have one thing in common: They are really not that hard to achieve. For instance, I’ve been playing golf for over 45 years and have never broken 70, although I’ve come close a half dozen times. So, do I have a goal of breaking 70 on my NYR list? Heck no. Eighty is my magic number to beat each year, and since I usually do that by April, I’m a happy camper, and the rest of the golfing year is “gravy.” Which leads me to financial NYR’s: Don’t make ’em if you can’t achieve ’em. Here are some I know you can achieve that will truly help get your finances in order:

Okay, “review and evaluate” seems way too hard. The trick is to have someone else do it for you! Take insurance, for example. A few years ago I called my then insurance broker and told him I would like to make an appointment to review all my insurance policies: auto, home, umbrella, etc. You would have thought I had asked the school wallflower for her first dance! The fact is, experts love to expound. For a professional insurance agent, the hour spent with you is a chance to show off his/her expertise, to solidify a customer relationship and, perhaps, to sell more insurance. For you, it’s a chance to review, reevaluate and perhaps update.

Same goes for your investments. Ask your stockbroker, if you have one, to sit down and review your holdings one-by-one. If you manage your own investments, take an hour or two to review the Morningstar or other financial service’s ratings on each of your holdings. This is also a good time to make sure that no investment has grown to larger than 10 percent of your total holdings. Remember, diversity is to investing what location is to real estate.

Mortgage bankers will also be thrilled to give you a free evaluation of your current mortgage(s)—something you really need to get done if you haven’t in the past two years.

As many of you know, 2011 is a strange, but critical year in the estate tax planning world. Starting January 1, 2011, unless Congress acts to block or alter things, The Economic Growth and Tax Reconciliation Act of 2001 (“Bush’s Tax Cuts”) will expire by law; among a gazillion other things, the estate tax will return with a vengeance. In a nutshell, any estate over $1,000,000 will be subject to a tax rate of 55 percent. This is a NYR you need to keep! You should call your estate attorney immediately; if you don’t, at least pull out your will (you do have one, don’t you?) and assess your situation.

While you’re at it, here’s another NYR: Write your congressman and senators and tell them to stop their grandstanding and, instead, work toward a compromise solution on the estate tax. I am certain Congress could pass and President Obama would sign an estate tax similar to the one we had in 2009 if Republicans and Democrats would stop running for office for one second and actually focus on passing good legislation. Note: The 2009 estate tax included a $3,500,000 exemption—that’s effectively $7,000,000 per couple—and a top tax rate of 45 percent along with 100 percent marital and charitable deductions.

You may call it professional pride, but I call it learning from experience. If you do your own tax return, it’s a good bet you’re doing it wrong. Here’s a little rap:

As for math errors,

Tax software does not commit;

It is really good

At arithmetic.

But if you forget,

Or if you miss

It faithfully records

Your every slip.

I’m a lousy rapper, but the point is with tax software, it’s “garbage in, garbage out.” Unless you have been keeping up with federal and state tax law for the last umpteen years, you’re probably making mistakes. If you insist on continuing to do your own return, at least pay a tax pro to review your last three years returns. The refunds you get will more than likely pay for the consultation fee.

I know I’m a math geek, but really, this is something you must and can accomplish in 2011. The “must” is because balancing your check book is one of your key defenses against identity theft and certainly the key way to avoid ridiculous bank fees for overdrafts. Not to mention the damage overdrafts do to your credit rating. If you don’t know how to balance your account, ask your banker to sit down with you and explain/demonstrate the process. If they don’t have the time, switch banks.

As any of my clients will tell you, credit card balances make me sick. The interest rates on these balances are generally obscene, and the interest paid is basically “dead interest”: It has no tax value and, unlike a car loan or such, the thing you bought with it—dinner, vacation, etc.—is a distant memory. Thanks to the Credit Card Accountability, Responsibility and Disclosure Act of 2009 you can now see on EVERY credit card statement just how long it’ll take you to pay off your account if you make a minimum payment. Usually this is 15 to 20 years and involves total interest payments of more than double your current balance. And God forbid you miss making the minimum payment! Then, a penalty fee is assessed and an even higher penalty interest rate kicks in (30 percent or even higher). Shameful!

If this NYR is impossible to keep, at least try to knock off the balances of a card or two. If that can’t be done, consider a credit counselor. It’s time.

You can do all the tax planning you want, but if you don’t keep records the way the IRS wants you to, you’re going to lose out if you get audited. The first step in achieving this NYR is simply to keep a manila folder marked “2011 Taxes.” Then, when you get anything—a receipt, a bank statement, etc.—that you even suspect might be tax related, throw it in the file; you can always toss it at tax time if it’s not needed. One personal mistake I’ve vowed to correct is to keep a better record of stuff I give away to charity. From now on, when I get the receipt from the charity, I’m going to staple to it a list of the stuff I gave away and/or attach a picture of the stuff taken with my Blackberry.

The IRS is particularly insistent on proper mileage records for business auto use, so if you’ve been slack on this record-keeping, now may be a good time to put it on your NYR list.

Twenty-five years ago, my internist asked me if I wore my seatbelt. While I did and always do wear a seatbelt (as should you!), I essentially told him it was none of his business. His polite answer was that, indeed, it was his business because I had a much greater chance of being killed on the highway than by some weird disease. Fair enough. So when I suggest adding “quit smoking” to your financial NYR list, it’s because smoking is truly dangerous to your financial health. At $4 or more a pack and a pack-a-day habit, you’re blowing about $1,500 per year through your lungs—a pretty sizable chunk of change. But the worst damage, from my financial planner’s perspective, is seen when you apply for health, life, disability, or long-term care insurance. If you answer “yes” to the question: “Have you used any tobacco products during the past five years,” you immediately drop three to five “rating” classes, resulting in significantly higher premiums for your coverage. And that’s if you can get coverage at all; actuaries REALLY hate smokers (and dippers)! The good news is that if you quit smoking NOW, you’ll start moving back up the rating scale every two years with the potential of getting all the way back to “preferred” non-smoker rates. (Note: Every insurance company has its own rules. You need to ask your insurance agent detailed questions on this issue.)

By the way, I quit smoking 30 years ago and still have an urge every once in a while, so I know this NYR is not an easy one to keep. Good luck!

This is pretty self-serving, but really and truly, what are you waiting for? The Certified Financial Planners Board of Standards conducted a study of consumers in 2009 and found that only about 17 percent had a current, updated written financial plan. So, you’re not alone. But, that’s no excuse. A comprehensive, objective (no sales stuff!), financial plan is a great way to get your financial house in order, and the recommendations from a competent planner should easily repay you for any fee you incur.


To comment or for more information, e-mail lewwessel@hargray.com.

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