It is a New Year! As I sit down to write my first blog post of 2018, I have been given the assignment of sharing financial New Year’s resolutions.
The first thing everyone should do is to understand how the recently passed federal legislation will affect their tax liability. Contrary to what you may have read, the chances are very good that you are receiving a reduction in your federal tax liability. Eighty percent of Americans will see their marginal tax rate go down in 2018 and less than 5 percent are projected to see an increase in their federal tax bill.
So, now that you likely are going to have more discretionary income, what should you do about it?
That depends on each individual’s financial situation, so there is not one answer to fit everyone. But, with that said, everyone should have a plan!
Here are a few suggestions:
If you have high-cost debt, think about adding to your monthly payment to pay the debt off more quickly. This could include student loan debt or credit card debt. Adding just a few dollars per month to repay high cost debt will save you many dollars in interest paid over the life of your loan. If I could only share one bit of advice to those with high cost debt or with heavy debt loads, this is the one.
If you sit in a “good” situation as far as debt owed is concerned, think about adding to your 401K contribution. This is especially true if you are under the age of 40. Why do I say that? The younger one is, the more the effect of compounding investment returns over time. It is near an absolute truth that one should contribute at least as much as his/her employer “matches” in a 401K. That match is akin to “free money.” Social Security isn’t going to be the sole answer for most Americans, so continue to pay attention to your 401K contributions.
And, while we are on the 401K theme, pay attention to your investment allocations. There is no question that some Americans were caught off guard when the market tanked in 2008-2009 (they had a higher allocation in stocks than considered prudent). Be sure your allocation between equities and fixed income is appropriate for your age and for your risk tolerance. There is no perfect answer here, but it is important to review your allocations.
One final word on the tax bill recently passed by Congress: if you do not have a reliable income tax advisor, get one! In this day and age of computer programs to calculate income taxes, we sometimes miss the personal touch that can be provided by a competent tax advisor. You do not have to be a millionaire to receive affordable and good tax advice. In fact, it has been my experience that money spent on a good tax advisor will be repaid many times over. Our bankers can recommend capable individuals in our respective communities who may be able to assist you.
Let me conclude with a couple of additional suggestions. First, if you are a baby boomer or older with the means to do so, consider establishing a “college fund” for your grandchildren. You can determine the appropriate investment mechanism, but if your grandchildren have more than ten years until they would begin college, consider equities if your risk tolerance allows it. I can remember my father investing a relatively small sum in stocks upon the birth of our three daughters and the returns by age 18 were significant and appreciated as we faced tuition bills. Think about that …
Finally, find a project for which you have passion and contribute toward it. There are many worthy projects and it’s not for me to say which one is for you. But, by giving back to your local community or to the world community, you will ultimately make a positive difference and, more importantly, you will feel good about your contribution.
What is written above is relatively simple. To be a successful manager of your personal finances will take some time and effort. But, the pay-off is likely to be significant.
May 2018 be a good financial year for you!