10 Financial New Year’s Resolutions: By Steven L. Smith

I’ve been a financial advisor for over 20 years now. During that time I believe I have seen almost every mistake you can possibly make with money. Take advantage of my experience and learn from other people’s mistakes. Begin the year with some Financial New Year resolutions. Many people say they procrastinate or never keep their resolutions. So in this article I’m offering up the easiest to implement and highest impact ideas I have to get your financial New Year off to a great start!

#10) Contribute to your company’s retirement plan – Many employers offer matching funds to any money you contribute to their retirement plan. Usually these matching funds are limited to the first 1-6% of your annual contributions. These matching funds can be anywhere from 25% to 100% matching contributions. If you don’t make your contribution, your employer doesn’t match your contribution and you lose out. If your company offers a 50% match on your contribution you’re earning a 50% return on your money by contributing to the company plan. Realistically there is no way any financial advisor is going to be able to equal that kind of return on your money. Example: Say your annual salary is $40,000/yr and your employer offers a 50% match on the first 6% of you contribute. An annual contribution of 6% or $2,400/yr would let you receive an additional $1,200 in matching funds from you company.

#9) Avoid debt – Much has been written and said about this over the years and millions of Americans have learned the hard way about taking on too much debt, especially credit card debt. However, it bears repeating again. As a general rule you should limit your debt to your home mortgage and a car payment. Debt repayments of any more than that and you are playing with financial fire. This doesn’t mean you have to or should tear up all you credit cards. What it does mean is that each month you should pay the full amount of any charges you have made on your card(s).

#8) Make a budget of your expenses – Review your list of resolutions. You know in your heart about the the vices or bad habits you may have. Smoking, alcoholic beverages, gambling, premium coffees, to many soft drinks, or to much fast food, excessive cell phone charges. All of these can add up to big dollars by the end of the month. Try to find one or two small things you can give up. Every little bit adds up. Saving $5/day adds up to $150/month.

#7) Invest systematically – Take any monthly savings you find and invest it systematically into a monthly savings plan. A monthly savings plan can be set up easily through your employer’s retirement plan, your local bank or credit union or your financial advisor. You’ll be pleasantly surprised about how much you can build up if you stay with it. In the above scenario the $150/month invested for 25 years at a 10% return yields about $200,000 at the end of the 25 year period.

#6) Review your cash reserves – There seems to be no middle ground for many investors on this one. Many of us have way to little in cash reserves or way to much in checking, savings, and money markets. Many financial advisors recommend that you have 6-12 months of salary set back in accounts that could quickly be converted to cash or checking deposits. This is a rule of thumb and a good starting point. However, your cash reserve balance should be based upon many factors, including whether your married or single, one income or two, whether or not you are self-employed, your job security, risk tolerance, years to retirement, the amount of equity you have in your home, how many children you have, etc. The point is to review you cash balances with your financial advisor. If you determine you’re short on cash reserves, immediately begin a monthly savings program to build them up. If your balances are too high consider investing the excess balances into a Roth IRA or other mid to long-term investment programs.

#5 Get out of the house – Ok, so what I really mean is to invest more overseas. Many investors suffer from what is called home country bias. Most Americans have a disproportionate amount of their investment portfolio right here in the USA. Investing more here in the good ‘ol USA may give you what you think is a lower risk, sleep at night factor. Counter intuitively, the opposite is true. It can be shown through the mathematics of modern portfolio theory that investing a portion of your investments overseas can reduce the overall risk of your accounts, increase your return or both.

As late as the 1970’s the US economy was more than half the total global economy. Today that has shrunk to about 20%. Because of electronic trading and globalization the diversification benefits of investing internationally have been declining over the last 10-12 years. (The subject for a future article)

Nonetheless, the diversification benefits of investing overseas are still well worth it. Some of the best companies and fastest growing economies are located overseas. The average investor here in the US has about 7% of their portfolios invested overseas. I generally recommend a range 10-30% of your long-term
portfolio be invested in international stocks and bonds, depending of course on your financial goals, age
and risk tolerance. For your reference regarding overseas investments: Global means a fund with both international and US investments. International means a fund invested strictly in developed countries
outside the US such as Canada, Japan, Australia South Korea and most of the Western European economies.

#4 Ignore the financial media – I know it’s hard to do, but its best to ignore the media projections and the pundit’s predictions. It’s fine to track your accounts and stay informed about the financial markets and recent economic data. However I would refrain from adjusting your financial plan based upon any forecast or hot stock tip. Those in the predictive business such as economists and stock analysts are bound to have some major missteps during their careers. An analyst who achieves 50-50 track record on the direction of any stock or stock market sector would be considered outstanding. A look back at the major media’s predictions from previous years about the economy, individual stocks, mutual fund, or economic sector to invest in would no doubt yield some rather dubious picks. This is not saying you should ignore major
macroeconomic trends, just don’t rely on them from month to month or even year to year. Further, if
you’re broadly diversified, as you should be, then you’re likely to have at least some of your money in what the pundits are advocating. So don’t sweat what the media is saying, their interest is in ratings, not necessarily good financial advice.

#3 Be a political skeptic – This may be a hard one for some of the reader’s of this on-line journal. Is Obama becoming more pro-business? This and other popular political questions are discussed ad infinitum, ad nauseum in the financial media. First of all, you have little to no control over this. Therefore, I recommend to focus on what you can control. The biggest determinate of every investors portfolio is the one they have the most control over, your level of diversification. Determine the level of risk/return you’re comfortable with and then with the help of a qualified financial advisor develop a well diversified portfolio that is targeted to achieve your desired rate of return.

#2 Know what you own – This can’t be repeated enough. Millions of Americans own financial assets or investments that they have been disappointed in or worse; products that are either way too expensive for
what the owners receive in return, or are unsuitable for their age, risk tolerance, or financial goals. This
doesn’t mean you need to run to the filing cabinet and dig out that prospectus or annual report and read it cover to cover. What it does mean is that if you have a stock, bond, mutual fund, annuity or insurance
product that you’re not sure what its purpose is, then you need to have your financial advisor sit down with you and explain to you in plain English just exactly what you have and why you have it.

#1 Get a financial plan – Did you expect anything less from a financial advisor? Seriously though, one of your best investments could be to pay your financial advisor to make a comprehensive review of all your finances. A comprehensive review should include: a review of your cash reserves, cash flow, life, disablility, and long-term care insurance including your group plans, investments, debts, federal and state taxes, projected retirement plans and estate plans, including beneficiaries, wills and trusts. Make sure that your investment and retirement plans fit hand in glove. For instance, if your projected retirement plans says that in order to reach your retirement goal at the desired age and standard of living your investments need to make 7.5% then your investment portfolio should have a mix of cash, stocks, bonds, real estate and commodities that is targeted to earning 7.5%.

So, now you have a checklist of things to get accomplished in 2011. Next week marks the beginning of the
busy part of tax season. I encourage you to make a pledge to gather all your financial information and get
with your tax preparer, financial advisor or both and begin reaching your financial goals today!

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the
purpose of avoiding any federal or state tax penalties.

Steven Smith Financial
5908 Berry Lane • Evansville, IN • 47710
Phone: 812-484-9338 • Fax: 812-402-5024
www.stevensmithfinancial.com

Securities are offered through Financial West Group (FWG), Member FINRA, SIPC
2226 S. Airport Road W. #C, Traverse City, MI 49684

Steven Smith Financial and Financial West Group are unaffiliated entities.