Now that we have settled in to the New Year, we at Chatham Wealth thought that now would be a good time to highlight some financial planning topics that might not be on the top of your mind. Here is a quick list of our top six things to look at for the beginning of the year:
1) Review and Rebalance Portfolios – During the past year the value of each of securities earned a different rate of return and your investment allocations have changed from your target. Over time these changes may increase or decrease the risk and return profile of your portfolio. We recommend reviewing all investment accounts including taxable brokerages, IRAs, 401k’s and college savings and rebalancing to your target allocation where appropriate. Rebalancing is the process of buying and selling securities to set your allocation back to your original target weightings. Regular rebalancing will help prevent your portfolio from the risk associated with oversized concentrations or other undue risks resulting from recent market movements. Also consider making regular additions to your portfolio and avoid the temptation to try and “time the market”.
2) Budget – The beginning of the year is when you should take a hard look at what you make, what you spend and how much you save. When creating a budget, make sure you have line items for savings such as IRA, 401K, 529 plans etc. Putting away for savings should be part of your budget. Go through the previous year’s expenses to get a solid picture of where your money went. Create the budget from there, cutting where you can, increasing might you might need to. Just make sure the budget is realistic or you won’t be able to stick with it. Setting aside funds for some sort of an emergency should be part of your budget as well.
3) Insurance – An evaluation of life, auto and other policies allows you to optimize pricing while ensuring adequate coverage. Check that your auto insurer has accurate vehicle usage and mileage information for each of your automobiles. If you car is aging you may consider reducing your Collision coverage and increasing your other coverage such as Personal Injury or Liability. On the life insurance front, make sure a non-working spouse has sufficient coverage that would replace all that your spouse does for the family. Also consider life changes that have occurred over the past year: Has your income increased? Do you have new dependents? These life changes may require an increase in coverage. Approximately 60% of Americans own life insurance and half of those insured have inadequate life insurance coverage to meet their family’s needs. Also consider extra liability insurance, known Umbrella Insurance that designed to protect you from claims and lawsuits. This is especially important for people that have total assets that are greater than the aggregate liability coverage provided by home, auto and boat policies. It is also important for individuals involved in activities that could lead to injuries of others, such as coaching youth sports or hosting frequent swimming activities at your home.
4) Automate your Savings – Pay Yourself First: In other words, take a set percentage of your paycheck and devote it to savings and investments. The key is that 1) The savings is on regular basis, such as bi-weekly or monthly. 2) It is automated, meaning the cash automatically moves from your paycheck to your savings or investment account. Your bank or brokerage account can help you set up electronic fund transfers on set schedule. The main advantage is that you will not be tempted to spend this money because you never see it in your day-to-day checking account. In an investment account, automated contributions can help take advantage of a dollar-cost-averaging strategy. This means that when prices are high, your money buys fewer shares, and when prices are low, your money buys more. Over time, this reduces your average cost of stock ownership and spreads your risk over time.
5) Long Term Disability Insurance – According to the Social Security Administration, 1 in 4 of todays 20 year olds will suffer some sort of disability before they retire. The average duration of the disability is 34.6 months, just about 3 years. While social security funds are available, they are not enough to pay your bills. Check your employer’s insurance benefits to see what the terms of the long term disability coverage are. You may find that even that is not enough to get you through. You can add another layer of coverage through private, third-party insurers. These policies can be created to better help cover your family’s needs during the time you are unable to work.
6) Debt Paydown Plan – If you have credit card debt of $15,000 at 17% interest rate, making a minimum payment of $250/month will result in the debt being paid off in about 11 years. The interest paid will be about $18,000 (above and beyond the original $15,000). A few strategies you can use are 1) Pay off a little extra each month. Paying $400/month will have the debt paid in 54 months with interest of $6,545. 2) If you have several credit cards (the average American has 3.7 cards), consider paying more to the card with the highest interest rate first, while still paying a little bit above the minimum on the others. 3) Debt Consolidation Loans – this approach needs to be considered with a high degree of caution. Often times, debt consolidation loans will reduce your payment by extending the period of the loan, and often times at a higher interest rate. Make sure you read the small print and understand what you are getting in to. The best debt plan is to create a budget, spend within your means, and keep debt to a minimum!
Chatham Wealth Management located in Chatham New Jersey is a SEC registered investment advisor serving high net worth individuals, retirement plans and trusts. Having one of our Certified Financial Planners work with our clients to perform a personalized comprehensive financial plan is the best way to determine the investment mix needed achieve your goals.