The first half of 2009 will soon be over so now is a good time to take a moment to reassess your financial situation and make certain you are on track for your short and long-term financial goals. Here’s a checklist of items for you to consider:
- Debt. Review your debt reduction strategy. If you don’t have one, consider this one: Starting with one index card for each debtor, make a list of all of your debtors, how much you owe along with the interest rates. Now, you can sort them one of two ways. Either sort them according to the highest interest rate to the lowest interest rate or sort them according to which debt will be paid off first. My preference is highest interest rate first. Add up the total minimum payments for all your debts together and then determine how much you can afford, through budgeting, to pay ‘extra’ each month. Take this amount and apply it to your #1 debt while paying the minimums on all other debts. Once your first debt is paid off, apply your ‘extra’ payment plus the minimum payment you were making on debt #1 to debt #2. Continue this strategy until your debts are paid off.
- Investing. I’m often asked the question of whether people should focus on paying off their debts or investing their money. The answer is both! Your long-term debt goal is to be totally debt free at retirement, including home mortgages. However, if you arrive at retirement debt free but have no investments, you’ll not be ready to retire. Don’t think for a minute that Social Security will be enough. Some people suggest that Social Security will not even be there when they retire, but I can guarantee that it will be very different than it is today and should not be relied upon. If you do not have a systematic investment plan in place today, it means you are on the Social Security retirement plan which is no plan! Even if your employer has discontinued company matching to your retirement plan, this, along with a deductible or Roth IRA is your best choice. Make sure that your total retirement savings is a least 10% of your total income.
- Contingency planning. Financial disruptions will occur so you’ll look brilliant if you’ve set aside some money to deal with them. The best strategy is to have a small amount, say $25 to $50 per month, automatically deducted your paycheck or checking account into a savings or money market account each pay period. If you feel your job is in jeopardy, you will want to save much more.
- Taxes. Midyear is a good time to review your income tax withholding to make certain you are not significantly under-withholding or over-withholding. Under-withholding will leave you a nasty surprise next April; over-withholding means you’re making the government (or General Motors!) a tax-free loan.
- Special goals. If you have special goals such as a new car, vacation, college funding for a child, set up an auto-funding strategy as I mentioned under ‘contingency planning’ above. Start with an amount you can easily afford and increase your contributions as you get pay raises or are able to trim expenses.