New Year’s Resolution! – Financial Planning & Budgeting

By Karl L. Fava, CPA

as appeared in
the December, 2001 edition of Staff Forum, (UAW International Staff Council), Volume 10, Issue 2

Typically, the start of a New Year creates the opportunity for one to turn over a new leaf and redirect one’s course. How often have you heard the question, “What is your New Year’s Resolution?” Many resolutions focus around self help type issues such as getting in shape, setting exercise routines, dieting, or kicking bad habits. A lot of people set out to achieve goals focused on education, employment, and other income generating endeavors. Even so, most of us forget to set goals and focus on our tax and financial situations. The beginning of a new year is one of the best times to focus on this. Along with most other resolutions developing tax and financial strategies are based on establishing and achieving pre-assigned goals and targets. The start of a new year can be looked at as the start of a goal-setting gauge that runs for twelve months. After twelve months you can review your personal tax and financial goals to see if you achieved what you set out to do and then design your new goals for the oncoming New Year.

One of the most important strategies within financial planning and tax savings is to establish and utilize a household budget. At the start of a new year you should review the prior year household income and expenses and develop a budget to follow for the next twelve months. The only way to develop any type of savings strategies is to make sure that you have a very good handle on the income coming into the household and the ongoing monthly expenses. Only after a thorough review of the ongoing expenses can it be determined how much should be allocated to savings. Additionally, reviewing ongoing expenses allows for a determination of what is necessary and what is not. In many instances expenses can be reduced and should be! For example, in the current low mortgage interest environment you need to review that you are paying the least amount of monthly mortgage interest that you can. A refinancing of your mortgage may be necessary. Additionally, in many areas of the country there are opportunities to shop around commodity-type utility expenses such as communications, electricity, and gas. A classic example of this is long distance telephone charges. You have to be diligent in taking a look at all the alternatives to see if you can obtain a lower price for ongoing monthly expenses.

Once a budget is set you need to focus on establishing a savings plan. The old adage of paying yourself first is one of the best ways to make sure that you are setting money aside. Every month your budget should include an amount that you are allocating for savings that comes right off the top before you pay any of your bills. So, this payment to yourself is actually an item on your budget. Most financial planners would recommend what is known as dollar cost average investing. This method of savings is based on setting a predetermined amount of money aside every month and having that money invested into some type of investment vehicle, for example a mutual fund. What this method allows for is a repetitive dollar amount being set aside and also for the best cost or average price of the investment. The reason for the latter is that no one can time the best point in the market to invest. But by investing every month you would actually get an average of the annual price for this investment.

Your tax resolutions need to focus on setting goals and strategies to minimize tax and thereby save money to be invested. Good examples of a start of the year tax strategies revolve around maximizing deferrals into qualified plans. Everyone should be participating in their employer’s deferred savings plans such as widely known 401(k) plan. For 2002 the maximum annual contribution has been increased to $11,000. After reviewing your budget you need to make sure that you are contributing the maximum that fits into your budget and potentially aim for the statutory maximum. You need to make sure that you are using any applicable pre-tax spending plans such as medical and child care. Additionally, at the beginning of the year you still have the opportunity to make an IRA contribution for the prior year. This should be considered with other tax savings strategies.

As discussed, after ringing in the New Year and focusing on resolutions you need to review you tax and financial situation. The short list of ideas above is only a primer and should be used as a guide for you to develop an overall tax and financial resolution for the New Year.

Byline:

Karl L. Fava, CPA, MBA is president of Business Financial Consultants, Inc., (BFC). BFC located in Dearborn, Michigan is a nationwide firm providing tax and financial services to individuals and businesses across the country and offshore. In the United States BFC has clients in most major cities and aggressively seeks to maximize tax and financial strategies for them. BFC’s web site is www.bfcinc.com. Mr. Fava’s e:mail address is kfava@bfcinc.com. BFC’s telephone number is (313) 359-9358.