It’s hard to believe that it’s 2010. Has it really been ten years since the Y2K scare? While the world has changed over the last ten years, there are financial planning strategies that can help position ourselves for success. If you’re looking for a few things to implement as we turn the corner into another decade, read on!
Here are three things you can do to help positively position you for a successful 2010!
1. Timely file your taxes
Most people handle their personal taxes in a reactive manner. They don’t spend much time during the current tax year preparing and planning to balance the tax liability due. Many folks put off preparing the tax return until the last possible minute, which can mean October.
It’s difficult to get a handle on your current year’s tax projections if you don’t file your previous year’s return until October. For those of you who year after year file for extensions and finalize your return in October, you know the burden you carry around until the return is finally signed and filed. If the return is filed in October, there are only a couple more months before the process begins again. Imagine the weight that would be lifted from your shoulders by filing your return when due (April 15th). I have seen this time and time again in my office with clients who were perpetual late filers. By filing timely, clients now have more time and energy to prepare for the current year’s tax burden and can focus on tax reduction strategies.
Remember that taxes are the single largest recurring expense that most of us will encounter from now until the day we die…..and the IRS will want a piece of the pie even after you die! So, why not pay more attention to this expense. File timely and focus efforts on reducing your tax liability through efficient tax planning. Start now by preparing documents for your tax preparer and strive to hit the April 15th deadline.
2. Establish a Spending Plan (Budget)
I realize I have said a bad word. The term budget conjures up similar feelings as “pop quiz” or “shot”. Just like testing and vaccinations are necessary, budgets have a very useful place in our personal financial world. The overall goal of a budget or spending plan is two-fold: 1. to make sure we spend less than we earn, and 2. to make sure we are doing the right things with our money (working towards goals and spending money in areas that bring us joy).
While not everyone will need a budget that is dialed down to the penny, some folks will need to see in black and white where their money goes every month. Knowledge is key, and having a budget on paper, in black and white, will help you visualize the income versus expenditure concept.
Again, not everyone will need a detailed budget. I feel that everyone will at least need to have a spending philosophy. In essence, if expenditures are less than income, liquidity is in place (emergency funds), goals (future needs) are being tended to, consumer debts (car loans…etc) are eliminated, and purposeful spending is occurring (spending money in areas that bring joy), then a person’s spending philosophy is right on track.
3. Take advantage of matching funds while savings for your retirement
While some corporations have reduced or eliminated matching funds in retirement plans, most have not. If your company offers a 401k/403b match, take full advantage of this free money. If your company matches up to 6% and you only contribute 4% into your 401k plan, then you are leaving free money on the table. There are not many free rides available for hard working folks, but this is one!
There is a nice additional benefit tied to retirement contributions. Money that is deferred into a retirement is not currently taxed. The government will help subsidize your retirement by delivering a tax break for retirement contributions. For example, a single tax payer in the 25% tax bracket who contributes $10k into their 401k will save a minimum of $2500 in taxes. That’s a 25% return on investment before the money even enters the market!
At first glance the above three items may not seem connected, but the interworkings of a good financial plan work hand and glove with all the integral pieces. These three pieces can work together to produce a positive snowball effect on a personal financial plan. With proper tax planning comes tax savings, which in turn frees up more money for cash flow. More cash flow allows for an increase in retirement contributions, which reduces taxes even further and again increases cash flow. You get the idea! Start 2010 on the right foot by taking positive steps to improve your financial wellbeing. Happy New Year!