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Get The New Year Off to a Good Start

With a Financial Refresher Course

Every New Year we make promises and lists of goals that we’re hoping to achieve in the coming year.  One common goal that may seem tough - but can be quite attainable - is getting your finances in order.  If you are building a brand new financial plan or getting your derailed plan back on track, you’ll need to start with some time-tested strategies that investors have followed for decades.  Let’s take a look at some of the basics:

Don’t sacrifice your goals.  These days, one thing that’s painfully obvious is that many investors have less money to invest.  The bear market in stocks has affected just about everyone, but you shouldn’t fall into the trap of thinking that saving is futile.  Investing for the future may be the only way you’ll be able to enjoy a financially secure retirement or pay for your child or grandchild’s education.  The market’s recent performance isn’t an indication that you can’t achieve your goals.  It simply means you’ll need to stay focused. 

Use tax-advantaged savings vehicles.  When it comes to increasing the amount you save, you need to make sure you’re contributing as much as possible to tax-advantaged savings vehicles.  Even though recent legislation lowered many tax rates, income taxes still reduce the return from your investments.  However, traditional IRAs and employer-sponsored retirement plans still let you defer taxes until retirement. Furthermore, Roth IRAs, Education Savings Accounts (ESAs) and 529 plans offer the potential for tax-free growth. 

Even if you’ve been discouraged by the recent market volatility, when it comes to participating in your employer’s retirement plan, regardless of what type of plan it is, you shouldn’t be tempted to stop or lower the amount you contribute for your retirement.  Some participants have reallocated their employer-sponsored balances toward lower potential return asset classes, such as cash or bonds.  Treat your employer-sponsored retirement plan as an integral part of your overall asset allocation and investment plan and review it along with your other holdings to ensure it’s still appropriate given your situation and current market conditions. 

Perhaps it’s time to revisit dividend-paying stocks or other rising income alternatives for the equity portion of your retirement plan balance.  And it may be time to trim your exposure to long-term fixed income securities, which might be vulnerable to loss in value due to higher interest rates that could be on the horizon. 

Take a disciplined approach to savings.  When it comes to investing, discipline may be the key to a successful plan.  Rather than spending your money and trying to save what’s left over, you should save first and then limit your spending to the remaining amount.  One of the best ways to do so is to save the same amount on a regular basis – be it each week or month.  For example, you can decide to save a specific amount out of each paycheck.

Reinvesting dividends instead of spending them is another strategy for increasing your savings in your taxable accounts.  Because dividends are paid on a quarterly basis and the amounts are generally stable, reinvesting them is yet another way to systematically help increase your savings.  In addition, with the passage of the 2003 tax relief act, dividends on common stocks of most U.S. and foreign companies are now taxed at a lower 15 percent tax rate (taxpayers in the 10 percent and 15 percent ordinary income tax brackets have a five percent tax rate), making this strategy more attractive than ever. 

Get going today.  While investing may have seemed easier a few years ago, it is still possible to make your money work for you.  Unfortunately, what foiled many investors was the mistaken belief that the good times would never end and that something as basic as an investment plan could be put on the shelf. 

By starting today and following the strategies outlined here and others your financial consultant may recommend, you can start the New Year on the right foot financially.

This article was provided by Jake Paltzer of A.G. Edwards & Sons, Inc.,
Member SIPC