Although investment and other financial decisions can be made any time of the year, it’s not a bad idea to establish a specific time of year to go over your financial plan in detail. Otherwise, you may be inclined to put off this important component of planning and, before you know it, another year will have gone by.
December is a great month for review and reflection, allowing you to start out with a fresh perspective and goals for the New Year. In my next few columns, I’ll talk about specific aspects of financial planning for 2006.
Surveys show that most Americans would like to save more, but that it’s difficult to find the money in their budgets to do so. Let’s make 2006 the year that you purposefully work toward the goal of saving and investment – perhaps increasing your retirement saving, establishing a college fund for your child, saving for a vacation or establishing a holiday fund (so you can avoid those credit card bills next year).
Here are a few ideas to make it less painful finding the money in your budget for saving and investing. With the high cost of credit-card interest (usually greater than the after-tax return on investments), any households with outstanding credit balances should use these strategies to apply to debt reduction first.
– Pay yourself first. This is a rule of thumb commonly offered by financial advisors. The money allocated to saving or investing should be taken right off the top at the beginning of the month, automatically withdrawn from your checking account and deposited in your investment account. If you wait until the end of the month to invest what’s left over, the funds may be gone, whittled away by small and often unnecessary expenditures.
– Save your raise. Make a deal with yourself that you’ll allocate all – or at least a significant portion – of your next raise to your savings and investment plan. If you don’t let yourself get used to spending the extra income and instead immediately put it toward your investment plan, it won’t feel like you’re cutting back.
– Set aside bonuses, tax refunds and other lump sums. When the money you’re applying to investments has never been part of your regular income, it’s even less painful to set it aside. Bonuses and other lump-sum windfalls such as birthday gifts, tax refunds and inheritances can be immediately applied to your investment plan.
– Continue a payment plan. When you’ve finished paying off an installment loan such as a car or student loan, consider shifting those dollars immediately to your investment plan. Since you haven’t been spending that portion of your income on consumption, you can put it toward this new use without feeling the loss.
– Stop up a cash leak. Carefully consider your household’s cash inflows and outflows to see if any obvious cash leakages can be applied to your investment program. For example, you could "brown-bag" your lunch three times a week, take books out of the library instead of buying them, rent videos instead of going to the movies and use public transportation or bike to work.
– Go on a financial diet once or twice a year. Many people find it easier to tighten their belts in short stretches. Try being a cheapskate for one or two months a year, trimming your budget down to just the necessities and banking the rest.
– Take a second job. Although you wouldn’t want to work two jobs indefinitely, consider taking a second job for one or two months and applying all the additional income to accumulating some investment capital or reducing debt.
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Vickie Bajtelsmit, Professor of Finance, Colorado State University College of Business, firstname.lastname@example.org, 226-1473