Herndon resident Theresia Wansi, Ph.D., (center) pictured with students from Marymount University, in Arlington, advises paying off high-interest debt. Photo courtesy of Marymount University
Before the rush of the holiday season, local financial experts say it might be time for a money tune-up. What should one do and when? Three local money gurus offer their top tips for getting one’s financial house in order.
Begin by developing a budget for the upcoming year based on your current spending levels. “You can pick up a lot of your fixed expenses, like debt payments, taxes and insurance premiums, fairly easily from your pay stub, mortgage statement, tax return and insurance declarations pages,” said Susan E. Hamilton, a McLean-based financial planner. “What are more difficult to determine are the variable, or lifestyle, expenses. We recommend that clients review their checkbook register or online bill payment records, as well as their credit card statements, which usually break down those charges by category. Also, review your bank statements for ATM withdrawals.” She suggests using computer software or an online program to track expenses for the upcoming year.
SAVING MONEY and paying off debt should be part of your 2013 budget as well. Steve Pilloff, a professor of finance at George Mason University in Fairfax, stresses the importance of saving: “Try to save aggressively, try to be disciplined about things like going out to eat,” he said. “Set money aside so that there is a reserve.”
“You always want to pay off the debt with the highest interest,” adds Herndon resident Theresia Wansi, a professor of finance at Marymount University in Arlington.
Locate and organize your financial records. “Save all of your year-end statements and any tax-related receipts,” said Hamilton. “Place them, along with all of the ‘Important Tax Information’ … you receive by mail, in one place … so that the information will be readily accessible … when it is time to prepare your tax return.”
“Try to save aggressively, try to be disciplined.”
—Steve Pilloff, Ph.D., George Mason University
EXHAUST HEALTH-RELATED spending before the end of the year. “A Flexible Spending Account is an employer-sponsored benefit plan that enables you to pay for eligible medical expenses on a pretax basis,” said Hamilton. “Any money deposited in an FSA must be spent on expenses incurred in that same calendar year. … Use up the balance of any unspent FSA funds to buy items such as eyeglasses, medication or schedule check ups.” Then, calculate your 2012 out-of-pocket health care spending to determine FSA deductions for 2013.
Next, maximize your retirement plan contributions. “Review your pay stub to see how much you have contributed to your employer-sponsored retirement plan so far this year,” said Hamilton. “Decide how much you wish to contribute for next year and, if possible, increase your employee deferral percentages for 2013 at the beginning of the year. You also have until April 15, 2013 to make your 2012 IRA contributions.
Wansi adds, “The younger you are, the more you want to invest in riskier investments. The higher this risk, the greater the return. If you are younger you have time for the market to rebound. The older you are the more you want to be very safe in your investments.”
MAKE ANY YEAR-END CHARITABLE DONATIONS prior to year-end. “If folks are thinking about … donations, if they get it in before the end of this year, they can write it off on their taxes for 2012,” said Pilloff.
Hamilton said, “Keep in mind that you can donate appreciated securities. You avoid having to pay capital gain taxes and you are still able to deduct the full market value of the donated security.”
Review your investment accounts. “It is good to delay your short-term capital gains and declare your losses before the year is over so that you can have the tax benefit,” said Wansi. “If you have investments that are not doing well, this is the time to sell them.”
Hamilton said, “Determine what your current allocation is — the percentage of the total value that is invested in stocks, bonds and cash. You may need to make some adjustments to bring your investment accounts back in line with their original target percentages. Consider taking some profits now. [The 2012] calendar year is a good time to recognize gains, because we know that the long-term capital gains tax rate is 15 percent. Next year it could rise to 20 percent, or even 23.8 percent, for high income tax payers.”
Finally, said Hamilton, monitor your progress toward achieving your financial goals. “A simple method to check your progress is to compare your 2012 year-end statements to your 2011 year-end statements,” she said. “Have the balances increased or decreased?”