With the first three months of 2023 behind us, it’s a good time to take stock of your financial plan. In this article, we’re focusing on the items that can help you stick to a financial plan between now and June.
April: Risk Management
April is the cruelest month, and not just because the weather can be iffy, or your taxes are due on April 18. Turns out it’s also a good month to become more aware of the various types of risk around you.
Check your credit standing. With data breaches and identity theft on the rise, it’s important that you remain vigilant for the warning signs of identity theft. Telltale signs include payments reported on your credit card statements that you didn’t make or credit cards accounts that you don’t recognize. Even spelling mistakes with your name and address on financial documents could be suspect.
Some people have turned to credit monitoring services for protection. These services automatically notify you of errors or inconsistencies in your credit reports so that you can proactively address potential misuse of your personal information. Remember that you are entitled to one free credit report from each of the major credit bureaus once a year. Be sure to flag any errors or attacks on your credit and resolve them quickly.
Pay down high-interest-rate debt. With interest rates on the rise, you could be paying more in monthly payments than you need to — adding to the risk that your debt can snowball. Be sure to pay off credit cards in full each month to avoid interest charges. Prioritize your debt repayments toward the highest-rate debt first (that is, your credit card, mortgage or car loan).
Make your traditional or Roth IRA contributions for 2022. Around 55% of Americans are behind on saving for retirement, according to a November 2022 Bankrate survey. Although there are many reasons people put off saving, the risk they run is “lifestyle creep,” or spending more money as they earn more. This can jeopardize long-term financial security.
You have until April 18, 2023, to make your IRA contribution of a total of $6,000 ($7,000 if you’re 50 or older) to all of your IRAs and Roth IRAs, provided you had earned income last year or, if less, your taxable compensation for the year. Your ability to deduct your contributions depends on whether you’re covered by a retirement plan at work, and your income level. Your ability to contribute to a post-tax Roth IRA is also dependent on your adjusted gross income (AGI).
It’s also a good habit to try to increase your savings rate every year, even if it’s just by 1% or 2%.
Note: A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. Please consult with your tax adviser before investing. Asset allocation does not ensure a profit or protect against a loss. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
May: Focus on Financial Literacy
Philosophers believe that those with a rich base of factual knowledge find it easier to learn more — a true case of the rich getting richer. Having financial literacy helps you solve money problems.
Open a 529 account for your child or grandchild. Named for a section of the Internal Revenue Code, 529 plans help you pay for qualified education expenses at eligible K-12 schools, colleges and universities, and graduate programs — both in the U.S. and overseas — on a tax-advantaged basis.
When used to pay for education costs, 529s are more powerful than a traditional IRA or Roth IRA: the maximum aggregate contribution limits vary by state, ranging from $235,000 to $529,000 per beneficiary. But keep in mind an important caveat: Non-qualified distributions are subject to income tax and a 10% penalty on earnings unless the named beneficiary gets a scholarship, attends a U.S. military academy, dies or becomes disabled.
The plusses of a 529 account vastly outweigh the minuses. As the account owner, you control how and where the money is spent. You can change beneficiaries, including yourself. And you have the ability to accelerate as much as $80,000 in contributions into one year, without generating a taxable gift, if the contribution is treated as if it were spread over five years. This makes 529 accounts useful for generational wealth transfer.
Note: Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary.
Help your children become financially literate. You don’t need to be a financial expert to talk to your kids about money. Just focus on five areas that any middle schooler or high schooler can grasp:
1. Goal setting: making short- and long-term saving feel easier and more attainable,
2. Decision-making: deferring gratification.
3. Money and inflation: learning how the value of a dollar can change and how it affects buying power.
4. Asset allocation: teaching kids how money grows, even if they don’t have any assets.
5. Diversification: not putting all your eggs in one basket (and what this means in the real world).
Educate yourself. Other than setting realistic goals for yourself, there’s no better lesson when it comes to managing your money than knowing what you own and why you own it. Find a book, podcast or blog that aligns with your financial values. Focus on topics that interest you, such as investing in technology or health care, bonds, currencies or real estate and so on. Being educated about opportunity and risk is the best preparation for becoming a successful investor.
June: Mid-Year Checkup
We’ll be halfway through the year on June 30. It’s a great time to check your progress since setting your annual goals in January.
Check your budget. Are you spending more on “nice to have” vs “must have” items? Now’s the time to scale back. Or, if your priorities have shifted, you need to adjust the budget. Expenses higher than you hoped? Track your spending for the next three months to see where it all goes. The important thing is to do your best to stay on target — but don’t punish yourself if you make a small misstep.
Review your asset allocation. The appropriate mix of stocks and bonds in your portfolio needs to reflect your investment goals and time horizon. The mistake most investors make is that they either pile on too much risk or take too little risk. Both can throw a monkey wrench into your future financial security. For example, bonds have recently become more attractive on a risk-adjusted basis and may deserve inclusion in your portfolio, particularly if you are getting close to retirement age. As always, it’s a good idea to consult with a qualified advisor before making any big decisions about your investments or financial plan.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including the possible loss of principal.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO 830 AM on Sunday mornings. Email Bruce and Peg at [email protected]. Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.
