You can share this content with others through social networking sites.
To do so you will be leaving Schwab.com and accessing a third party site.
Please note that Schwab does not endorse these sites or the products and services you might find there.
Like this article? Listen to Rande's related audio.
by Rande Spiegelman, CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research December 30, 2008
Reprinted from the December 2008 issue of Schwab Investing Insights®, a monthly publication for Schwab clients.
It wouldn't be the New Year without resolutions. But whether it's trimming your waistline or firming your financial profile, the key isn't making the list, it's sticking with it! That's particularly true now, given the current bear market and economic downturn. Here are five steps to get you started. You don't have to do everything at once. Just get going. We believe that, as you move from one step to another, you'll feel stronger—and closer to achieving your goals.
Resolution No. 1: create a budget for life Financially speaking, life can be viewed as a series of cash inflows and outflows. Saving and investing during your working years should hopefully lead to a rising net worth over time, enabling you to achieve many of life's most important goals, like funding your retirement. Creating your own budget and net worth statement can help you build your road map and stay on track, even during tough times.
1. Create a budget.
Track your spending for at least 30 days.
Separate essential from non-essential expenses.
Put savings first, starting with high-priority goals like retirement (see "Get Smart About Savings").
Our retirement savings rule of thumb: Save 10%–15% of pre-tax income starting in your 20s. Add 10% for every decade you delay (see "How Much Should You Save for Retirement?").
Consider the impact of taxes—it's what you keep that counts.
2. Calculate your personal net worth annually.
It doesn't have to be complicated. See "How Much Are You Really Worth?" for a worksheet to help you net your assets and debts.
While your net worth may decline in tough years (like this one), it should generally be rising during your earning years.
If you're retired, you'll want to plan a drawdown strategy to make your money last as long as you do.
3. Identify your goals and create a plan to achieve them.
With your budget and net worth statement in hand, prioritize your goals. Give them a ranking, time frame and target savings rate.
4. Project the cost of near-term, must-have, big-ticket items.
Think tuition, property taxes and vital maintenance (the roof).
Treat that money as spent. Keep it in liquid, safe investments like FDIC-insured CDs. To compare rates, go to Schwab.com > Investment Products tab > CDs & Money Markets > Certificates of Deposit.
5. Retired? Invest your living-expense money conservatively.
Keep any money needed for the next 12 months in liquid, relatively safe investments like short-term CDs or money market funds.
Keep another one- to four-years' worth of spending laddered in short-term bonds as part of your portfolio's fixed income allocation (see "Write Your Own Retirement Paycheck").
If you aren't yet retired, keep at least three months' worth of essential living expenses in liquid, relatively safe investments like savings accounts and short-term CDs. That way, you can avoid having to sell when the market's down or incurring penalties by withdrawing from tax-deferred accounts.
Resolution No. 2: manage your debt
Debt is neither inherently good nor bad—it is simply a tool. For most people, some level of debt is a practical necessity. That said, problems arise when debt becomes the master of the borrower, not the other way around. Here's how to stay in charge.
1. Keep your total debt load manageable.
Don't confuse what you can borrow with what you should borrow (see our Mortgage and Borrowing library). Keep the monthly costs of owning a home (principal, interest, taxes and insurance) to no more than 28% of your gross income. Your total debt service shouldn't exceed 36% of your gross income.
Try to avoid borrowing to buy depreciating assets, such as cars.
Pay off, or at least lower, your credit card debt.
Consider consolidating your debt in a low-rate home equity loan or line of credit (HELOC), which can be tax-deductible—but only if you can control the debt and not put your home equity at risk.
3. Match repayment terms to your time horizons.
Likely to move before seven years? Consider a shorter-maturity loan or an adjustable-rate mortgage (ARM), as long as you can live with upward mortgage payment resets if your plans change.
Don't borrow assuming your home will automatically increase in value. Historically, long-term home appreciation has significantly lagged the total return of a diversified stock portfolio.
Resolution No. 3: invest with a plan
Getting better investment results is a goal we all share. But investing is a means to an end, not an end unto itself. So stay focused on your goals. Create a plan that will help you stay disciplined in all kinds of markets. Follow it and adjust it as needed. Here's how.
1. Focus first and foremost on your overall investment mix.
Revisit your asset allocation, the overall mix of stocks, bonds and cash in your portfolio—and make sure it's still in sync with your long-term goals, risk tolerance and time frame. To find a target asset allocation for your goal, log in to the new Schwab.com, click on Guidance, and use our Portfolio Checkup tool.
2. Diversify across and within asset classes.
Diversification is the second most important factor in helping you reach your goals. Mutual funds and exchange-traded funds (ETFs) are great ways to own a diversified basket of securities in just about any asset class.
3. Consider taxes.
Place relatively tax-efficient investments in taxable accounts and relatively tax-inefficient investments in tax-advantaged accounts (see "The Importance of Tax-Efficient Investing").
4. Monitor and rebalance your portfolio to stay on track.
Evaluate your portfolio's performance using the right benchmarks. For example, use the S&P 500® Index for U.S. large-caps.
Remember, the long-term progress that you make toward your goals is more important than short-term portfolio performance (see "Are You There Yet? ").
Use the Portfolio Checkup tool on Schwab.com to monitor your portfolio and periodically rebalance it back to its target asset allocation to stay on track with your plan (see "Why You Should Rebalance Your Portfolio").
Resolution No. 4: prepare for the unexpected
Risk is a fact of life. Your financial life can be upended by all kinds of nasty surprises—an illness, job loss, disability, death, natural disasters or lawsuits. If you don't have enough assets to self-insure against major risks, resolve to get your insurance in shape.
1. Protect against large medical expenses with health insurance.
Get a health care policy that matches your needs in areas such as coverage, deductibles, co-payments and choice of medical providers (see "The Biggest Risk to Your Retirement").
2. Purchase life insurance only if necessary.
Unless you have large liabilities that will continue after your death for which you can't self-insure, you may not need life insurance (see "Your Money or Your Life?").
Using costly insurance contracts as investment vehicles (like whole life and cash value policies) is usually inferior to purchasing low-cost, term life policies and investing the difference yourself.
Take advantage of the policy offered by your employer, but secure outside coverage if the policy is not transferable or if you need additional life insurance.
3. Protect your earning power with long-term disability insurance.
The odds of becoming disabled are greater than dying young. If you can't get adequate short- and long-term coverage through work, consider an individual policy.
4. Protect your physical assets with property-casualty insurance.
Check your homeowner and auto policies to make sure your coverage and deductibles are still right for you.
5. Obtain additional liability coverage if needed.
A personal liability "umbrella" policy is a cost-effective way to increase your liability coverage by $1 million or more.
Obtain business or professional liability insurance if needed, as umbrella policies don't cover business-related liabilities.
6. Consider the pros and cons of long-term-care insurance.
About 59% of people over 65 don't spend any time in a nursing home. The average stay for those who do is 2½ years.1
Look for a policy that is guaranteed renewable with locked-in premium rates.
Find out such things as what type of care is covered (skilled nursing, custodial care, home-assisted living), eligibility criteria, benefit period, elimination period, maximum daily benefit, whether there is inflation coverage and how solid the insurer is.
Resolution No. 5: protect your estate
Without an estate plan, the fate of your assets or minor children may be decided by attorneys, government bureaucrats and tax agencies. Taxes and attorneys' fees can eat away at your estate, and delay the distribution of assets just when your heirs need them most. Here's how to protect your estate—and your loved ones.
1. Update your will so your final wishes are fulfilled.
A will can provide for support and care of your dependents, and help you avoid the costs and delays associated with dying without one (see "So You Don't Think You Need a Will?").
2. Coordinate asset titling with the rest of your estate plan.
The titling of your property and non-retirement account can affect the ultimate disposition and taxation of your assets (see "Leave Less to the IRS").
Keep information on beneficiaries up-to-date to ensure the proceeds of life insurance policies and retirement accounts get to your heirs quickly, without having to pass through the probate process (see "Estate Planning: Four Steps to Avoid Probate").
3. Have in place durable powers of attorney and health care.
In these documents, appoint trusted and competent confidants to make decisions on your behalf if you become incapacitated.
Make sure a trusted and competent family member or close friend knows the location of your important estate documents.
Finally, remember you don't have to do everything at once. Take one step at a time. Make some real progress on your journey in 2009.
1. Source: National Association of Insurance Commissioners.
Important Disclosures
Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.
Past performance is no guarantee of future results and your investment value and return will fluctuate such that shares, when redeemed, may be worth more or less than original cost.
An investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.
Exchange-traded funds are subject to risks similar to those of stocks. Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost.
Diversification and asset allocation strategies do not assure a profit and do not protect against losses in declining markets.
The S&P 500 Index is an index of widely traded stocks. Indexes are unmanaged, do not incur fees or expenses and cannot be invested in directly.
Certificates of deposit offer a fixed rate of return and are FDIC-insured. Penalty for early withdrawal may apply.
Fixed income investments are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, corporate events, tax ramifications and other factors.
This report is for informational purposes only and is not an offer, solicitation or recommendation that any particular investor should purchase or sell any particular security or pursue a particular investment strategy. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Examples provided are for illustrative purposes only and are not representative of intended results that a client should expect to achieve.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
Call us at 866-232-9890
Send us an email
Facebook
LinkedIn
Twitter
Digg