Today, many people find themselves bombarded by a constant stream of financial news from television, radio, and the Internet. Yet, does all this “information age” data really help you manage your finances any better now than in the past? Often, what are considered old-fashioned practices, such as performing periodic financial reviews, can lead to greater success in the long run. Why not spend a few hours reviewing your finances? The changes you make today could result in increased savings. Consider the following seven important items:
- Analyze your cash flow. When your income is greater than your expenses, the excess is called a positive cash flow. When your expenses exceed your income, the shortfall is termed a negative cash flow. A positive cash flow means that you may have funds you can set aside as savings. A negative cash flow indicates that it may be time to reorganize your budget to minimize unnecessary expenses.
- Develop a plan for special goals. For every financial and retirement goal you establish, identify a projected cost, a timeline (how long it will take to reach the goal), and a funding method (through savings, liquidating assets, or taking a loan). Consider your goals in terms of a “hierarchy of importance.” The bottom, or “foundation” tier, may include emergency funds to cover at least six months’ worth of living expenses. The middle tier may include essentials, such as your children’s education. Place less important goals, such as renovating your home or taking a vacation, on the top tier.
- Boost your retirement savings. Social Security and pensions may not provide sufficient income to maintain your current lifestyle in retirement. Therefore, it is essential to identify your retirement needs and plan a disciplined savings program for the future. Maximize your contributions to your retirement accounts, and if possible, make “catch-up” contributions.
The elective contribution limit for those who participate in 401(k), 403(b), or 457 plans is $19,500 for 2020. The catch-up contribution limit for taxpayers age 50 and over who participate in 401(k), 403(b), and most 457 plans is $6,500 in 2020, bringing the total contribution limit for those age 50 and over to $26,000 in 2020.
In addition, traditional Individual Retirement Account (IRA) and eligible Roth IRA holders age 50 and over can save an extra $1,000 a year, bringing the contribution limit to $7,000 in 2020.
- Minimize income taxes. Consider taking advantage of all income tax deductions to which you are entitled and exploring ways of reducing your income taxes. For instance, under appropriate circumstances, losses or expenses from prior years may be carried over to the next tax year. A qualified tax professional can help you implement a tax strategy that meets your needs.
- Beat inflation. Your income and retirement savings must keep pace with inflation in order to maintain your buying power. This means that if the inflation rate is currently 3%, you need to achieve at least a 3% annual increase in income just to break even. If your long-term savings plan fails to keep pace with inflation, you may be unable to maintain your current standard of living.
- Manage unexpected risks. Without warning, a disability or death can cause financial hardship for your family. Adequate insurance is an important foundation for your financial plan—it offers protection to help cover potential risks and liabilities.
- Consult a qualified financial professional. In today’s complex financial world, everyone needs help making informed decisions. Sound financial planning can help ensure that your current needs and long-term goals are on track.
An annual financial review can help bring focus and clarity to your overall financial picture. In the future, you may wish to modify your plans according to changing goals and circumstances. By reviewing your finances periodically and tracking your progress, you may be in a better position to achieve financial independence and realize the retirement of your dreams.
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