12 Fiscal Fitness Tips for 2012 

With a brand new year upon us, New Year’s resolutions abound. According to Time Magazine, two of the ten most common resolutions include increasing physical health and fiscal health. So while our CPAs can’t help you with your physical health (other than to share that research shows that 60% of those new gym memberships go unused and gym attendance is back to normal by Valentine’s Day), we can assist with your financial health tips.

First, remember that while wealth may be realized when the economy is booming, that’s not actually when it’s created. Why? When the economy is in a decline, those with money are able to invest it and then realize the returns as the economy rebounds. While none of us would wish for a declining economy and the impact on those around us, the situation does create an opportunity to put your cash to work.  Therefore, CRI has outlined 12 Tips for Fiscal Fitness for 2012 to help you create financial opportunities.

#1. Prepare a realistic annual budget.

Financial health begins with an evaluation of income versus expenses. When preparing a personal annual budget, first allot for fixed monthly expenses, and then determine monthly miscellaneous expenses. A common benchmark is to ensure that the ratio of all monthly debt payments does not exceed 36% of your gross monthly income. Also don’t forget to include quarterly, semi-annual, and annual bills such as insurance premiums, property taxes, homeowner association dues, and charitable contributions. It’s common that these are forgotten during the budgeting process since they’re not paid every month.

Next, compare the actual to budget either weekly or monthly to track your progress. Be sure to make necessary adjustments both weekly and monthly in order to stay on track and ultimately attain your original year-end goals. For convenience that may also ultimately improve your compliance, consider online tools and/or smartphone apps to assist with budgeting and tracking.

 #2. Improve organization.

As Ben Franklin famously said, “By failing to prepare, you are preparing to fail.” So start planning for success by first reviewing CRI’s Record Retention Schedule and implementing an organizational system that works for you—from a basic shoebox to a complex online system. Also consider keeping up with and providing the most commonly missed documentation to your CPA, which includes (but is not limited to):

● Amounts of estimated tax payments made and dates of payment.

● Closing statements for any refinance or new home purchases.

● Personal property tax statements.

● Real estate tax statements.

● Investment advices.

● 1099s.

● Cost basis for investment sales.

And be sure to read CRI’s full article on Getting Organized for the Tax Year.

#3. Consider opportunity costs in all planning.

Opportunity cost is an addition to actual cost that describes what the spender misses out on by not taking advantage of alternative uses for that same money. For example, say that a CPA of CRI purchased a brand new iPad 2 for an actual cost of $750.  The opportunity cost is what he or she could have made by investing those dollars at, say, an 8% rate for 9 years—doubling the individual’s money for an opportunity cost of $1,500. So, just for fun, pick one room of your house and consider what hasn’t been used since original purchase. What is the total opportunity cost?

#4. Review spending habits and look for saving opportunities.

Have you heard of “Four Bucks?” This common term used to refer to Starbucks and the typical cost of a mocha, frappuccino, or other specialty joe illustrates the small items most of us purchase daily without too much thought. But this $4 spend for each of 365 days annually equals almost $1,500. Following a similar opportunity cost theory and compounded as noted above, the savings would be significant. That’s why not only saving these bucks, but also investing them correctly, is so critical for long-term financial success.

While you can inherit or marry money, create a product, or win the lottery, the most consistent way to create wealth is to live within—or even beneath—your means and invest the savings (see #6).

#5. Minimize debt.

While there is positive debt—the type with a lower interest rate than that you are making on the money you could use to pay it or on something that is increasing in value—for the most part, paying interest is simply paying money to borrow someone else’s money. Importantly, don’t borrow money to purchase something you can’t actually afford. And remember, even interest that is tax deductible must be paid to the lender in order to receive the deduction, so there is still a cash flow impact and after-tax cost. 

Over time—and if not managed correctly—debt may negatively impact credit scores, as explained more in #10, which ultimately costs individuals even more money.

#6. Evaluate your financial standing  regularly—and your progress against personal goals including retirement.

While money obviously doesn’t grow on trees, it does have some similarities. Like a tree, money should be planted or invested and then cared for properly. Both take time to grow. Therefore, instead of comparing bank account balances monthly—or even annually—it’s important to review a full financial snapshot to evaluate your progress. For some people, creating a personal financial statement as a snapshot helps; for others, a regular check is plenty.

When considering your financial standing, retirement investments are a key consideration. One of the best ways to invest includes retirement plans due to the tax benefits you can receive by allowing the government to subsidize part of your retirement savings. The impact of tax deductions or deferring taxes on retirement plan investments can supercharge your account balances. For additional details and tips, be sure to also review CRI’s Combating Common Retirement Mistakes article.

#7. Review your investment portfolio and re-balance as necessary.

CNN Money now recommends subtracting your age from 110 or 120 to determine the percentage of stocks within your portfolio since life expectancies have lengthened. While that is certainly only a rule of thumb that doesn’t fit every situation, it does help to make the point that your mix of investments should change with the course of time. Your portfolio should reflect a number of considerations, with one of the most important ones being your tolerance for risk. Remember that your proximity to retirement should be inversely proportional to the level of risk in your portfolio. So do not fall into the trap of allowing your investments to remain fixed for years—at least not without being sure they continue to be right for your current financial situation.

#8. Review insurance coverage and policies.

Insurance policies abound, with coverage ranging from life to disability, as well as health and long-term care. A person’s insurance needs evolve over time with changes in family circumstances and lifestyle. CRI’s Common Insurance Mistakes article outlines some basics for consideration.

#9. Create and/or update your estate plan every three years—and review beneficiaries.

Contrary to popular belief, estate plans don’t require homes in the country or castles on the hillside. Often a person will have issues with their estate that need to be addressed long before achieving the status of “wealthy.” Do you have questions about estate planning? CRI’s Life & Estate Planning article is here to help, and also be sure to follow CRI’s Guidelines for Designating Beneficiaries to ensure you’ve crossed all of those T’s and dotted potential I’s.

#10. Review your credit score, and if needed, proactively improve it.

Credit scores are determined by borrowing history and the ratio between the card balances and total credit availability. Consider that long-held credit card accounts lacking negative reports are often seen as proof of credit responsibility. As for the negatives, you probably know that low credit scores equal higher interest rates and insurance costs—and ultimately higher expenses. And that’s just the beginning of the snowball effect prior to considering opportunity costs…again.

There are three major credit scoring agencies in the country. It’s wise to review your credit record annually to ensure accuracy and proactively improve your score as needed. 

#11. Review password and data security.

            Taking proactive steps does not begin and end with a financial plan and savings plan; it also requires a protection plan not only for you (see insurance coverage in #8 above) but also for your financial data—both business and personal. Be sure to read CRI’s full article outlining 10 Tips for Stronger Passwords. And if you have questions or concerns about your business data, contact CRI’s IT Consultants to request a full evaluation.

#12. Implement tax strategies year-round.

Don’t wait until New Year’s Eve to evaluate your options. Chat now with one of CRI’s tax professionals to discuss home improvements and lesser known deductions so that you’re well-prepared for the 2012 tax season and keep at least one of your 2012 resolutions. And if you do that, even Ben Franklin might have been proud.