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New Year's Financial Resolutions: Get Your Finances in Shape for 2018

Many people make resolutions on New Year’s Day. But no matter what your resolutions are, the key isn’t making the list, it’s sticking with it. Here are five resolutions that can help increase your financial fitness today and in the new year.

Resolution 1: Create a budget for life

When it comes to finances, life can be viewed as cash flowing in—and out. Saving and investing during your working years, if you stick with it, should lead to a rising net worth over time, enabling you to achieve many of life’s most important goals. Creating your own budget and net worth statement can help you build your road map and stay on track. Here are steps that can help:

  • Create a budget and pay yourself first. If you’re not sure where your money is going, track your spending using a spreadsheet or an online budgeting tool for 30 days. Determine how much money you need to cover your fixed monthly expenses, such as your mortgage and other living expenses, and how much you’d like to put away for other goals. For retirement, our rule of thumb is to save 10–15% of pre-tax income, including any match from an employer, starting in your 20s, then add 10% for every decade you delay saving for retirement. Once you commit to an amount, consider ways you can save automatically. Research shows that if you “pay yourself first,” it makes savings easier.
  • Calculate your personal net worth annually. It doesn’t have to be complicated. Make a list of your assets (what you own) and subtract your liabilities (what you owe). Subtract the liabilities from the assets to determine your net worth. Don’t panic if your net worth declines during tough market periods. What’s important is to see a general upward trend over your earning years. If you’re retired, you’ll want to plan a drawdown strategy to make your net worth last as long as necessary, and to support other objectives
  • Project the cost of essential big-ticket items. If you have a big expense in the near term, like college tuition or roof repair, increase your savings and treat that money as spent. If you know that you’ll need the money within a few years, keep it in relatively liquid, relatively safe investments like short-term certificates of deposit (CDs), a savings account or money market funds. If you choose to invest in a CD, make sure the term ends by the time you need the cash. If you have more than a few years, invest smartly, based on your time horizon.
  • Retired? Invest your living-expense money conservatively. Consider keeping 12 months of living expenses after accounting for non-portfolio income sources (Social Security or a pension) in short-term CDs, an interest-bearing savings account, or a money market fund. Then keep another one to four years’ worth of spending laddered in short-term bonds as part of your portfolio’s fixed income allocation. This helps provide the money you need in the short term, allowing you to invest other money for a level of growth potential that makes sense for you, while reducing the chances you’ll be forced to sell more-volatile investments (like stocks) in a down market.
  • Prepare for emergencies. If you aren’t retired, we suggest creating an emergency fund with three to six months’ worth of essential living expenses, set aside in a savings account or money market fund. The emergency fund can help you cover unexpected-but-necessary expenses without having to sell more volatile investments.
     

Resolution 2: Manage your debt

Debt is neither inherently good nor bad—it’s simply a tool, if used smartly. For most people, some level of debt is a practical necessity, especially to purchase an expensive long-term asset to pay back over time, such as a home. However, problems arise when debt becomes the master, not the other way around. Here’s how to stay in charge.

  • Keep your total debt load manageable. Don’t confuse what you can borrow with what you should borrow. Keep the monthly costs of owning a home (principal, interest, taxes and insurance) below 28% of your pre-tax income and your total monthly debt payments (including credit cards, auto loans and mortgage payments) below 36% of your pre-tax income.
  • Eliminate high-cost, non-deductible consumer debt. Try to pay off credit card debt and avoid borrowing to buy depreciating assets, such as cars. The cost of consumer debt, if you carry a balance, adds up quickly. 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, set a realistic budget and plan to pay it back, and don’t  put your home equity at risk.
  • Match repayment terms to your time horizons. If you’re likely to move within five to seven years, you could consider a shorter-maturity loan or an adjustable-rate mortgage (ARM), depending on current mortgage rates and options. Don’t consider this if you think you may live in your home for longer, or may not be able to manage mortgage payment resets if interest rates or your plans change. While tempting, we also don’t suggest that you should 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 3: Optimize your portfolio

We all share the goal of getting better investment results. So create a plan that will help you stay disciplined in all kinds of markets. Follow your plan and adjust it as needed. Here are ideas to help you stay focused on your goals.

Focus first and foremost on your overall investment mix. After committing to a savings plan, how you invest is your next most important decision. Have a targeted asset allocation—that is, the overall mix of stocks, bonds and cash in your portfolio—that you’re comfortable with, even in a down market. Make sure it’s still in sync with your long-term goals, risk tolerance and time frame. The longer your time horizon, the more time you’ll have to benefit from up or down markets.

  • Diversify across and within asset classes. Diversification reduces risks and is a critical 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.
  • Consider taxes. Place relatively tax-efficient investments, like ETFs and municipal bonds, in taxable accounts and relatively tax-inefficient investments, like mutual funds and real estate investment trusts (REITs), in tax-advantaged accounts. If you trade frequently, do so in tax-advantaged accounts, such as an individual retirement account (IRA), to help reduce your tax bill.
  • Monitor and rebalance your portfolio as needed. Evaluate your portfolio’s performance at least twice a year using the right benchmarks. Remember, the long-term progress that you make toward your goals is more important than short-term portfolio performance. As you approach a savings goal, such as the beginning of a child’s education or retirement, begin to reduce investment risk, if appropriate, so you don’t have to sell more volatility investments, such as stocks, when you need them.
     

Resolution 4: Prepare for the unexpected

Risk is a part of life, particularly in investments and finance. Your financial life can be upended by all kinds of surprises—an illness, job loss, disability, death, natural disasters or lawsuits. If you don’t have enough assets to self-insure against major risks, make a resolution to get your insurance in shape. Insurance helps protect against unforeseen events that don’t happen often, but are expensive to manage yourself when they do. The following guidelines can help you prepare for life’s unexpected moments.

  • Protect against large medical expenses with health insurance. Select a health insurance policy that matches your needs in areas such as coverage, deductibles, co-payments and choice of medical providers. If you’re in good health and don’t visit the doctor often, consider a high-deductible policy to insure against the possibility of a serious illness or unexpected health-care event.
  • Purchase life insurance only if necessary. First, take advantage of a group term insurance policy, if offered by your employer. These don’t generally require a medical check, and can be cost-effective to provide income replacement for dependents. If you have minor children or you have large liabilities that will continue after your death for which you can’t self-insure, you may need additional life insurance. Unless you have a permanent life insurance need or special circumstances, consider purchasing a low-cost term life policy rather than a whole life policy, and invest the difference yourself.
  • Protect your earning power with long-term disability insurance. The odds of becoming disabled are greater than the odds of dying young. According to the Social Security Administration, a person who turned 20 in 2017 has a 26.8% chance of becoming disabled before normal retirement age, and a 6.1% chance of dying before retirement age.¹ If you can’t get adequate short- and long-term coverage through work, consider an individual policy.
  • Protect your physical assets with property-casualty insurance. Check your homeowners and auto insurance policies to make sure your coverage and deductibles are still right for you.
  • 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, in case you’re at fault in an accident or someone is injured on your property. Umbrella policies don’t cover business-related liabilities, so make sure your business is also properly insured, especially if you’re in a profession with unique risks and aren’t covered by an employer.
  • Consider the pros and cons of long-term-care insurance. About 58% of women and 44% of men over age 65 will use nursing home care, according to the Center for Retirement Research at Boston College; the average duration of nursing home care is 0.88 years for men and 1.44 years for women.2 If you consider a long-term care policy, look for a policy that provides the right type of care and is guaranteed renewable with locked-in premium rates. Long-term care typically is most cost-effective starting at about age 50, and becomes more expensive or difficult to find, generally, after age 70. You can get independent sources of information from your state insurance commissioner. A sound retirement savings strategy is another way to plan ahead for long-term care costs.
  • Create a disaster plan for your safety and peace of mind. Review your homeowner’s or renter’s policy to see what’s covered and what’s not. Talk to your agent about flood or earthquake insurance if either is a concern for your area. Remember, neither is included, generally, in most homeowners policies. Keep an updated video inventory of valuable household items and possessions along with any professional appraisals and estimates of replacement values in a safe place away from your home.
  • If you’re tech-savvy, consider storing inventories and important documents in the cloud. It’s also a good idea to have copies of birth certificates, passports, wills, trust documents, records of home improvements and insurance policies in a small “evacuation box” (the fireproof, waterproof kind you can lock is best) that you can grab in a hurry in case you have to evacuate immediately. Make sure your loved ones know about this file as well, in case they need it.
     

Resolution 5: Protect your estate

An estate plan may seem like something only for the wealthy. But, there are simple steps everyone should take. Without proper beneficiary designations and other basic steps, 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 these assets, and delay the distribution of assets just when your heirs need them most. Here’s how to protect your estate—and your loved ones.

  • Review your beneficiaries, for all investments or other products or accounts. The beneficiary designation is your first line of defense, to make your wishes for assets known, and ensure that that transfer to who you want them to without lengthy court or probate process, that can delay the transfer to loved ones. 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.
  • Update your will, or if you don’t have one yet, prepare it this year. A will isn’t just about transferring assets. It can provide for your dependents’ support and care, and help you avoid the costs and delays associated with dying without one. Also, remember, a beneficiary designation or asset titling trumps what’s written in a will, so make sure all documents reflect your desires.
  • Coordinate asset titling with the rest of your estate plan. The titling of your property and non-retirement accounts can affect the ultimate disposition and taxation of your assets. Talk with an estate attorney or lawyer about titling of assets, such as a home or other assets, that don’t have a beneficiary designation, to make sure they reflect your wishes, and are consistent with titling laws that can vary by state.
  • 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.
  • Consider creating a revocable living trust. This is especially important if your estate is large and complex, and you want to spell out how your assets should be used in detail
  • Take care of important estate documents. 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. There’s a lot you can do to improve your financial health. Take one step at a time. Make some real progress on your journey this year.

1 Source: Maleh, Johanna and Tiffany Bosley. “Disability and Death Probability Tables for Insured Workers Born in 1997.” Social Security Administration, October 2017.

2 Source: Friedberg, Leora, Wenliang Hou, Wei Sun, Anthony Webb. “Long-Term Care: How Big a Risk?” Center for Retirement Research at Boston College, November 2014.

What you can do next

  • The new year is a great time to review your portfolio and make sure it’s appropriately diversified and aligned with your risk tolerance and investment timeframe.
  • Want to talk about your portfolio? Call our investment professionals at 800-355-2162.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. 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.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Rebalancing does not protect against losses or guarantee that an investor’s goal will be met. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events can be created that may affect your tax liability.

This information is general in nature and not intended as specific, individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, please consult with a qualified tax advisor, CPA, financial planner, or investment manager.

Please consult with your tax advisor on the deductibility of home equity line of credit interest payments for your specific tax situation.

The discussions of various investment types herein is  in no way intended as a solicitation of any product or service offered through Charles Schwab & Co., Inc., its affiliates, or any other investment firm.

Investing involves risk, including possible loss of principal.

Diversification strategies do not ensure a profit and fdo not protect against losses in declining markets.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

Risks of the REITs are similar to those associated with direct ownership of real estate, such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and credit worthiness of the issuer.

Taxexempt bonds are not necessarily a suitable investment for all persons. Information related to a security's taxexempt status (federal and instate) is obtained from thirdparties and Schwab does not guarantee its accuracy. Taxexempt income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.

Investment and insurance products are not deposits, are not FDIC insured, are not insured by any federal government agency, are not guaranteed by a bank or any affiliate of a bank, and may lose value.

The Schwab Center for Financial Research (SCFR) is a division of Charles Schwab & Co., Inc.

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