Welcome to 2008, the International year of Sanitation, the United Nations International year of the Potato, the year of the preservation of the Coral Reef, as well as the Beijing Summer Olympic Games, a Presidential election, and a leap year. There will be plenty of ways to keep busy in this New Year, but before January ends, make some changes to ensure that your new year will be more prosperous than the last.
One of the greatest things you can implement this year that will benefit you and your family is a written-in-stone-stick-to-it-or-else budget. A sound spending plan will force you to pre-think all of your expenses and will help you to avoid pitfalls. The first step in successful budgeting is committing yourself to the project. Developing a plan will take time and dedication, but the payoff will be worth it. Before you write your budget, you must determine what your spending habits have been in the past. Look back at the last six months of bank statements and average your expenses. This will help you face up to weaknesses or triggers you may have. Once you understand your spending habits, and perhaps a cringing reality of where your money really has been going, consider all of your income sources. Put that number at the top of a column, and then begin to itemize your monthly household costs, transportation costs, and food. Then include rows for debt retirement, saving for the future, and yearly expenses such as vehicle registration, property taxes, and gifts. At the bottom of your list, you can include eating out, entertainment, clothes shopping, movies, etc. As you allocate your spending, prioritize your long-term goals and look for ways to trim expenses. When you see your precious dollars on paper, you may find the willpower to have your cable turned off and transfer that money to the Visa column instead. When budgeting, getting started right away is important, but you must expect the unexpected. You won’t perfect your budget on your first try, but adjust as you go and don’t give up.
Budget time is a great time to reconsider your investment strategy. If you have a 401K, think about how much you are contributing now. If you are younger than 35, single, or if your employer has a funds matching policy, get on the phone now and max your contributions. Your investments will grow exponentially as compound interest does its magic. Compound interest is a wonderful concept; as your money accumulates, the interest earned creates more capital which creates more interest and so on. Your money breeds money, but it takes time, so the more money you can get into your fund early in your career, the bigger your money snowball can grow.
You should also take a hard look at your asset distribution. Typically, younger people can afford to take a riskier and more aggressive investment strategy, while people closer to retirement age will need to move into the defensive to protect their nest egg from market fluctuations.
One crucial point to remember is your 401K is not your emergency house account. You should never dip into this fund. When you take money out of a 401K prematurely, not only will you incur a large tax penalty, but you rob yourself of the future earnings you would realize as a result of compound interest. It is just not smart to do it.
Another way to make your money work harder for you this year is to track all of your tax deductable dollars throughout the year. This will not only ease your paperwork stress for next tax season, but keeping an accurate record will help you to reduce your overall taxable income, and ultimately put more of your money in your pocket. Some examples of federal tax deductions are mortgage interest payments, equity loans, charitable contributions, business expenses, union dues, educational expenses, and loss to capital from the sale of under-performing stock.
It is true that money makes the world go around, and many financial experts are projecting that the economy will be hit in the coming year with some amount of recession.
When you strategize ways to spend less and save more, regardless of what the economy is doing, your financial future will become brighter.