7 Smart Financial Steps to Take in 2019
Is this the year you want your financial picture to shine? We’ve got some good news: There are no tax increases looming, and the banking, housing and labor markets are solid. That means this is the perfect time to shore up your personal finances and prepare for the long haul.
Here are some steps you can implement when opportunity, cash flow, existing debt and mental fortitude allow. Barring a sudden global economic or personal meltdown, you could wake up next January with a satisfied smile on your face.
1. Lower your income; secure your future.
If you’re over 50, consider setting up a defined-benefit plan to reduce your company’s taxable income -- and ultimately yours. As earnings rise, you may be able to contribute more than with a defined-contribution plan, such as a SEP (simplified employee pension). Defined-benefit plans provide a fixed, preestablished benefit for employees at retirement. There is also an age-weighted profit-sharing plan you can set up for you and your employees that follows a similar structure. If that sounds too complex for you, then make sure to take these tax deductions (which many people overlook): sales taxes, healthcare premiums and expenses for charitable work and education.
2. Wake up -- retirement will cost more than you think.
Ego makes a bad rudder for retirement planning. Even if your business is thriving, you should maximize what you can set aside in SEP IRA accounts -- regardless of your age. The old rule that you’ll need 70 to 80 percent of your current income for retirement ignores unexpected business costs and reversals that will eat into your assumed nest egg; long-term healthcare costs not covered by Medicare; and the possibility that your children might not be as financially independent as you’d like them to be.
3. Dump bad debt for good debt.
Your credit cards are killing you. “Bad debt is anything that is not being used to build your net worth: clothes, furniture, vacations or dinners out,” explains Steph Wagner, Entrepreneur’s personal finance columnist. “Beyond avoiding wasteful spending, it is important to be strategic with interest rates. While today’s average APR [annual percentage rate] is 15 percent, you might be surprised to learn that you have a card in your wallet that charges significantly less. Personally, I have one at 5.1 percent.”
Wagner’s advice: consolidate. However, don’t be duped into other seemingly cheap sources of credit. “I am not a fan of borrowing against retirement accounts [IRA or 401(k)]; it should be your absolute last resort.”
Given current rates, a home equity line of credit may be your cheapest source of capital. If that isn’t an option, consider borrowing against your permanent life insurance policy (assuming it is whole or universal). This type of policy builds up cash over time, which can be borrowed against tax-free. Another benefit is that you don’t have to pay back the loan (instead, your death benefit is reduced by the borrowed amount) -- but if you do it pay it back, the interest rate is generally 7 to 8 percent, much less than the average credit card.
4. Go ahead, touch the principal.
Unless you’ve socked away millions in stocks and cash, it’s not realistic to live off interest and dividends alone. So plan now, not later, to use stock-price growth as part of your total investment picture. “I know it’s scary for most people to think about drawing down principal,” says Rob Williams, director of income planning at the Schwab Center for Financial Research. “A better way to think about it is that you’re tapping capital gains and reallocating them into something more secure [like bonds].”
Williams is quick to remind that capital gains are “a source of returns as much as interest and dividend payments. A portfolio balanced between equities, bonds and cash can deliver all three.” Over time, they should beat the average 2 percent yield on bonds, as well as inflation.
So how do you begin putting this to work in the next 12 months? “Consider dividend-paying stocks for up to 60 percent of your portfolio’s allocation. Blue-chip dividend payers are a good place to start,” Williams advises. “Then 40 percent in cash investments and bonds or bond funds for stability and income. Intermediate-term bonds or bond funds provide just such an anchor.”
5. Crowdsource your kids’ college education.
If you haven’t done so, set up a 529 (college savings) plan and ask friends and relatives to contribute money. Surveys show that most grandparents would contribute to a 529 plan if asked. Another tip: Don’t stop contributing once your kid is enrolled. Paying tuition through the 529 ensures the tax break.
6. Ease up on rebalancing.
You already know to periodically rebalance your holdings, cashing in star performers to buy more of the laggards. But how often? The old wisdom—every quarter—has given way to the new: once a year. “There is no one optimal rebalancing strategy,” says Colleen M. Jaconetti, a senior investment analyst in Vanguard’s investment strategy group. “Having said that, we believe that for most investors, implementing a rebalancing strategy based on reasonable monitoring frequency, such as annual or semi- annual, and rebalancing only when the portfolio has drifted beyond an allocation threshold of 5 percent (e.g., your holdings in, say, international growth funds have dropped from 20 percent of your portfolio’s value to 15 percent) is likely to produce a balance between risk control and cost minimization.”
Jaconetti acknowledges that rebalancing can be tedious but says, “What some investors don’t realize is that they may not have to do many actual transactions in order to rebalance their portfolio. In practice, portfolios can be rebalanced using the existing cash flows.” These cash flows include using dividends, interest payments, realized capital gains and any contributions or withdrawals in the portfolio.
7. Hire an honest accountant.
The Internal Revenue Service is cracking down on unscrupulous tax preparers. Hiring the wrong person can trigger audits, costs for revising statements and other headaches. “The tax code is huge,” says Kay Bell, author of The Truth About Paying Fewer Taxes. “The key here is credentials. You want someone who stays on top of tax-law changes.”
Seek recommendations from people who share your specific tax situation. “If you have a small manufacturing business, you want a tax professional who works with small manufacturing businesses and knows the intricacies of the tax code in this area. Plus, having a preparer who is familiar with your business needs is particularly important now, with all the Affordable Care Act tax ramifications,” Bell explains.