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What have you done for yourself lately?

A healthy business is not enough

By William Lynott

If you’re like many business owners and managers, you keep a more watchful eye on the fiscal health of the business than on your personal financial affairs. That’s not a good idea. These are two separate challenges; both need and deserve your best efforts.

It’s not unusual to see business executives doing an excellent job with their operating statements and cash flow while cheating themselves and their families by failing to manage their earnings skillfully.

There is no better time than now to review your personal financial health and your plans for a secure future.

Here are a few guidelines for keeping your personal finances in good health:

Never let any of your money lie idle

Since most banks pay little or no interest on checking accounts, your job is to keep checking account balances to a minimum while making certain that you never overdraw them or incur minimum balance fees. Here’s a technique that will allow you to come out the winner:

Open a money market account at your bank. Then have the bank link your new account to your checking account so that you may transfer money between them by telephone or online.

From then on, never make a direct deposit into your checking account. Make all deposits into the money market account where they will immediately begin drawing interest. While interest on money market accounts is currently abysmally low, that’s a temporary situation. Money market accounts will always pay more interest than checking accounts.

Transfer money online or over the phone to the checking account only as needed to cover the checks you write. This technique is so easy to use that there is no reasonable excuse for not taking advantage of it.

Save money by paying your bills online

While you’re talking with your bank, ask about online bill paying. With the cost of postage now at 45 cents for each check mailed, and likely to go up again soon, plus the time and expense for buying and writing checks, paying bills from your computer keyboard saves both time and money.

Don’t be in a hurry to pay your bills

There’s good reason why checks are slow to come in from people who owe you money. It’s because hanging on to cash as long as possible keeps that money available to draw interest.

Set up a system to pay your bills just before they come due. It’s easy and it moves you up another rung on the ladder of profitable cash management.

Don’t jeopardize your credit standing by paying bills late. Pay your bills just before they’re due–not before, not after. It’s especially important to avoid late payment on credit card bills because of the oppressive penalties that issuers now charge.

Maximize your tax-deferred retirement account early

“Don’t wait until tax filing time to fund your retirement account,” says CPA, Carol I. Katz, Baltimore, MD. “Making the maximum allowable deposits into your 401(k) or IRA account as early in the year as possible not only reduces your tax load, it also adds months to the tax-deferred compounding of your investment.”

Not everyone interviewed for this story has a 401(k) account, but those who do regard it as an essential part of personal finance management.

The maximum allowable 401(k) contribution for 2012 is $17,000, with an extra $5,500 allowed for those age 55 or older. This figure changes every year.

If you’re not in a position to make the maximum allowable contribution, contributing the most that finances will permit is a wise move from both the tax and investment points of view.

Never forget taxes

If you’re like many business executives, you think of every dollar as being the same as every other dollar. Actually, there are two kinds of dollars: before-tax dollars and after-tax dollars.

After-tax dollars are real dollars; each one is worth 100 cents. Before-tax dollars are quite different. While they may look the same on paper, a before-tax dollar is something of an illusion; it’s worth less than 100 cents. How much less depends on your tax bracket and how well you do your homework.

That’s why it’s important to maximize those after-tax dollars. “One way to do that can be as simple as avoiding less tax efficient investments.” says Peter Miralles, President, Atlanta Wealth Consultants, Atlanta, Ga.

“One tax trap is high turnover mutual funds,” he says. “Fund managers who indulge in excessive turnover create additional tax burdens plus the additional cost of frequent sales and purchases within the funds.” Miralles suggests that the relatively new Exchange Traded Funds (ETFs) can be highly tax efficient alternatives.

“The interest from Series EE and I-Bonds is deferred until redemption,” he says, and is fully exempt from state and federal taxes when used for higher education tuition.”

Miralles, recommends keeping certificate of deposits (CDs) maturities short for now. When interest rates rise, he suggests tax-free municipal bonds. “Tax free interest may have other additional benefits by lowering your marginal tax rate on other income,” he says. If you lower your marginal rate, you get to keep more of what you earn.”

Prepare for the new inflation

The relatively quiet inflation rates of recent years are likely to become a memory, according to many economists. The massive amount of money being pumped into our system is sparking fears that the Federal Reserve will be unable to keep prices in check; thus, a new round of significant inflation.

While there are many ways to hedge against inflation, including investment in equities with a proven record of dividend increases, Treasury Inflation Protected Securities (TIPS) are among the expert’s favorites.

The only investment that gives you guaranteed payments that won’t lose value over time are TIPS bonds,” says Carol Fabbri, Fair Advisors, Denver, Colo. “The return for both the interest and the principal on TIPS adjusts with inflation so your money is protected even if there is significant inflation. If possible, put TIPS in a tax-deferred portfolio.”

For more information on TIPS, check the U.S. Treasury’s web site: www.savingsbonds.gov/

Don’t follow the herd

Virtually all financial professionals agree that investment in stocks is a necessity for building a solid financial future in our modern economy.

When it comes to investing in the stock market, human nature likes to play tricks on us. When the market is reaching new peaks, we can’t wait to jump in. When it stumbles and falls, we stop investing, or worse, we start selling. As a result, the typical investor tends to buy-high and sell-low — exactly the opposite strategy needed for profitable investing.

“Today’s economy has caused many investors to realize that their tolerance for risk is not as great as they thought during the stock market boom of 2002-07,” says Bruce R. Barton, Certified Financial Planner, San Jose, Calif. “As a result, many are lowering the amount of stock they hold in their portfolios. Reducing risk by decreasing stock holdings may be appropriate, however, people are living much longer now and a typical retiree will live on his or her retirement portfolio for 20 years or longer.”

Barton points out that a portfolio must have a growth component to keep up with inflation over the long term. “That means portfolios should include a moderate amount of stock. You should think carefully before changing your long term commitment to stock investments,” he says.

Don’t try to time the market

“It’s better to invest regularly, without regard for the general condition of the economy or the direction of the stock market,” says Darrell J. Canby, CPA/CFP, President Canby Financial Advisors, Natick, Mass.

“Timing the market, trying to determine the best time to buy specific stocks, rarely works,” he says. “You might get lucky once in a while, but your luck isn’t likely to last.”

Rick Willeford, MBA, CPA/CFP, Atlanta, Ga. says simply, “Market timing and day trading are for suckers. The financial press makes money from advertising, and they do that by keeping you breathlessly chasing the latest tip or fad. They make money whether you win or lose.”

Waiting for stocks to hit “bottom” before you buy or hit the “top” before you sell has long since proven to be a loser’s game for investors. Select the stocks or mutual funds that you buy only on the basis of sound fundamentals.

Don’t neglect asset allocation

Most financial advisors agree that asset allocation is one of the most important keys to successful investing. In the minds of many, allocating your assets skillfully among the various classes of investments is more important than your selection of individual stocks or mutual funds.

When you start investing, should you have 10 percent of your portfolio in stocks, or should it be 80 percent or 90 percent? What about the rest? Should you invest the balance in bonds, CDs, or should you stuff it under the mattress?

For people investing over the long-term (10 years or longer) some advisors suggest a balance of 60 percent stocks, 30 percent bonds, and 10 percent cash. For really long periods, say a worker just starting in business, as much as 80 percent or 90 percent in stocks might be appropriate.

Chances are that your bank or brokerage firm has published guidelines for asset allocation in differing circumstances. In the end, however, the choice is yours. No one knows your investment goals and your tolerance for risk as well as you do.

Once you establish the right asset allocation for your circumstances, it’s important to re-balance at least once a year.

“Quite often people invest money and then never make any changes,” says Seth Ingersol, President, Premier Wealth Management Group, Tempe, Ariz. “Certain sectors of the market obviously perform better or worse than others at given times. This can alter your allocation mix to a level that may not be appropriate given your timeframe and risk for tolerance. The days of letting investments sit and never addressing them again are likely over.”

How much money we earn is the yardstick by which many of us measure financial success. For those in the know, however, earnings are only one-half of the money equation. Equally important is the manner in which we manage those earnings. Making the right money decisions is an essential ingredient in the recipe for long-term financial success. Right now is the time to sharpen up your personal money management skills.

Lynott is a veteran freelance writer who specializes in business management and personal and business finance. Reach him at lynott@verizon.net or blynott.com.

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