PLanning Your Financial Makeover

Only a few years ago most of us could let some financial details and tasks slip through the cracks. The economy and investment markets were doing so well most of us could afford to miss opportunities to save money or increase wealth.

That is not the case today. Interest rates are low and even after the big rally, longer-term investment returns are low or negative. Earned income also is falling for most people.

A solution is to take a day or two to give your financial life a thorough makeover. First, spend some preparation time developing the areas you want to work on and possible actions to take. Then, set aside a day or two to implement as many of the ideas as possible. With some luck and hard work, you might be able to replace all of the income lost during the last year. Don’t focus only on saving money. Organizing and implementing much-delayed tasks make you feel better and put you in place to capture opportunities.

The areas you should focus on depend on your financial details. Here are the areas I recommend.

Financial fees. Many banks, brokers, and others spent the last two years increasing fees to make up for loan losses, lower interest rates, and reduced income. But not all institutions raised fees, and you can fight back. Charles Schwab & Co. and a few other discount brokers actually reduced fees. Schwab, TD Ameritrade, and others also have affiliated banks. Checking accounts and debit cards make banking through a broker as easy as the traditional route. They want to be your main or sole financial services provider, and they slashed fees to attract your business. Spend some time on a few web sites, and you might save hundreds of dollars annually on fees.

Utilities. A few phone calls here could save a lot of money. If you have cable or other paid television, review the bill. You might be paying for programming and other services you rarely use. Give your provider a call. It is not unusual for providers to reduce costs if someone indicates they will cancel. If not, you probably can save money by dumping some services or adding (bundling) other services. In many areas, you save by receiving television, telephone, and Internet through one provider.

Key: Don’t set-it-and-forget-it. Most providers offer a good introductory deal, and then increase fees after a year or so. Be prepared to do this again in a year or so.

If you make a lot of long distance telephone calls, especially internationally, you should consider the Web-based discount services such as Vonage, MagicJack, and Skype.

Review your mobile phone plan. You might be paying for more standard minutes than you use each month. If so, choose a lower “free minute” plan. If you regularly go over your free minutes, switch to a higher minute plan. The cost per minute and total cost should be lower than for exceeding your included minutes.

More and more people are dumping their telephone landlines. They use only mobile phones and perhaps an Internet phone service. Consider if this will work for you.

Bill paying. There are two big problems with monthly bills, including credit card statements: late fees and the time involved in paying. Both can be reduced or eliminated with automatic payment plans.

There are different ways to set up payment plans. If you bank online, using either your bank’s web site or software such as Quicken, automatic payments can be set via computer. Another solution is to set up an ACH plan with each vendor. The business withdraws from your checking or savings account each month the amount you owe. You can even do this with charitable contributions, if you give to the same organizations regularly. All you have to do is be sure there is enough in the account to cover your bills. Also, be sure to review monthly statements for mistakes and overcharges.

A related step is to limit or eliminate the use of credit cards. Use debt cards instead. The charges are deducted directly from your account. You won’t owe interest or late fees for late payments. A caution is many debit cards do not have the protections credit cards do for disputes with retailers, lost cards, and stolen identities.

Tax planning. A frequent financial heart-ache is to learn while preparing your annual income tax return that a few steps before the end of the year could have saved quite a bit of money.

Estimate your tax bill for the year, and be sure your withholding and estimated tax payments will avoid any penalty for underpayment of estimated taxes. If you are behind schedule, it is better to have withholding increased. Withheld taxes are considered to be paid evenly throughout the year. Estimated tax payments are tracked as of the date paid. You generally must pre-pay taxes evenly throughout the year. If you make large estimated payments at the end of the year, you still might owe late penalties.

Likewise, if you employ a nanny, housekeeper, yardworker, or other person at your home and will pay more than $1,700, be sure you have the records to report this on your tax return and will pay appropriate employer taxes. Details are in IRS Publication 926.

After squaring away prepaid taxes, look for opportunities to reduce taxes by Dec. 31. We reviewed these opportunities in the March and September issues of 2009, which are available on the members section of the web site.

Estate plan. Like most people you probably have put this off. Begin by developing statements of your assets and liabilities. As we discuss in this visit and past visits, a good estate plan also covers non-financial matters such as a financial power of attorney, health care power of attorney, and the custodian of minor children, as well as disposition of your assets.

Insurance. Review all your insurance policies. See if you are over-insured or under-insured. Do you want to reduce premiums by increasing deductibles or copayments? If you have had the same insurer for a few years, do a quick check on the Internet to see if lower premiums are available from other insurers.

You might find other steps will improve your financial situation. Add them to the list.  Plan a day or two to knock out these tasks. You’ve been thinking about them for a while. It is time to take action and improve your finances.

RW October 2009.