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An Action Plan for 2010


iStock_000009936851XSmallHere’s what we know so far:  Over the past year, the recession has taken a toll on our sex lives, our health, and our sanity.

Here’s what I have to say about that:  New year.  New decade. New start.

It is time to stop whining about the recession and figure out how you can best participate in the recovery.  That means take control of your money if you ceded it to the stress of the last year, or grabbing hold even if you never had all that much control before.  (I’m not, by the way, ignoring the still-dismal unemployment picture.  If you are out of work, particularly if you have been for a while, the only task on your to-list is finding that next job.)  But if you have a job – or you have enough savings to tide you over until you find that next one — I want you to consider the steps below. Each will help you build a more secure – and prosperous – financial life.

Increase your automatic savings.  You should be saving 10 percent of every dollar you earn.  If you’re not, kick it up right now.   And if you can’t get to 10 percent immediately, work up to it one percentage point at a time.  For instance, if you were contributing 6 percent of your income to your retirement account at work, call your benefits department and increase that percentage to 7 or 8.  If you haven’t been saving for retirement at all because you don’t have a plan at work, open an IRA or a Roth if you qualify.  By automatically depositing $416 a month (if you’re under 50) or $500 (if you’re 50 or over), you’ll max out your ability to contribute.  And if you’re already maxing out at work or in an IRA, but have the ability to save more,  start funneling a few hundred or thousand more a month into savings or investments anyway.  Why? If you can’t think of a pressing need for it, you shouldn’t be spending it.  Believe me, there will come a time when you’re grateful to have the flexibility and freedom it will provide.

Double check your credit. Go to annualcreditreport.com and pull your Experian credit report for free.  Go over it.  Make sure that all of the information on the report a) belongs to you and b) is accurate.  If it’s not, dispute the information online.  Then go to CreditKarma.com and check your credit score for free.  If it’s not higher than 720, it needs work.  Make sure you’re paying every bill on time (automatic bill pay can help), using no more than 30 percent of the credit you have available to you overall and on each individual card, don’t apply for any additional credit and don’t cancel any cards you already have.    Even if you’re not in the market for any big loans – mortgages or auto loans – right now, maintaining a high credit score heading into the new decade is crucial.   Scores below 660 mean you’ll likely pay more for auto and homeowners insurance as well as any money you borrow in the year to come.

Refi anything that makes sense.  I got an email over the weekend from INGDirect offering a 3.75% 5-year adjustable rate mortgage.   I’ve also seen 15-year fixed rate loans at 4.5% and 30-year fixed rate loans around 5.25%.  According to the forecast from HSH.com, the leading publisher of mortgage-rate information, rates should hold into the first quarter of 2010, then head ½ to 1 full percentage point higher.  What that means is that refinancing likely makes sense for you if you know you’ll be moving within 5 years, you could save ½ to 1 percentage point on the rate you have now, you can afford to go from a 30-year-loan to a 15 (payments may be surprisingly equal because of the gap in interest rates), or you’ve improved your credit recently and can now qualify for a preferential rate.  You may also want to refi car loans (if you shopped harder for the car than you did for the financing).  Credit unions are a good place to shop for one.    And what do you do with the money you unlock?  That’s right.  Save it.

Consider the Roth conversion.  2010 offers a one-time opportunity for anyone to convert a Traditional IRA to a Roth IRA.   With a Traditional IRA, as you likely know, you pay income taxes on your current rate when you withdraw the money from the account – which you have to start doing by the time you reach age 70 ½.  With a Roth IRA, you pay taxes when you put the money in.  But you don’t have to pay more taxes upon withdrawal, and you never have to make a mandatory withdrawal if you don’t want to – you can pass the entire account to your heirs tax-free.  That makes a Roth a good estate planning tool.  A conversion also makes sense for anyone who believes their tax rate in retirement will be higher than it is right now (generally younger folks) or anyone who believes tax rates are headed no where but up.  When you convert you have two years to pay taxes on the converted amount at your current income tax rate.  If you don’t have enough to pay the taxes on your entire balance, consider converting a portion of the account rather than the whole thing.

Institute the purchasing pause.  Sometimes shopping – buying things – makes us feel as if we’re in the driver’s seat.  When we’re spending money we are reaffirming our existence, asserting our power (there’s a reason they call it purchasing power), and telling the other people in our lives that they can’t tell us what to do.  Not buying, interestingly, feels the same way.   When you’re evaluating a purchase, hemming and hawing and you decide to walk away, you get the same sort of satisfaction and feeling of control that you do when you decide not to eat the piece of chocolate or not to bail out of spin class before the hills.  The best way to walk away is the purchasing pause.  Take a 24-hour breather before buying anything significant.  Often you’ll decide really don’t need (or want) it anyway.

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