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Getting Financially Fit in the New Year

January 2003
Getting Financially Fit in the New Year

By Raj Chokshi, CPA, MBA, CFP

As the New Year arrives, many of us have goals for the New Year. Most of the time, people discuss how they want to lose those extra pounds after the holidays, but few make resolutions about becoming financially fit. Becoming financially fit, like become physically fit, requires goal setting, execution, and perseverance.���Fortunately, financial fitness does not require huffing and puffing on the treadmill, but simply requires time and some effort.

First and most importantly, do you have a financial plan? When you start on a long journey of any sort, the first thing you typically do is get a map to help you get from point A to point B. A financial plan is a roadmap that helps you determine where you are today, where you want to go, and how to get there. A comprehensive plan typically covers all areas of your financial life from budgeting, taxes, insurance to investments. It should help you assess your current financial situation, set goals, and then determine how to get there.���Here are some areas that comprehensive financial plans help you consider:

1) Emergency Fund. This is basically liquid cash that you should have in case you lose your job or business or fall on hard times with your health. This should include your core living expenses such as mortgages, car payments, utilities, and basic necessities. A majority of families need about three to six months of liquid funds. Your emergency fund should never be invested in the stock market. It should be placed in money market funds, or short term government securities that are not subject to much principal fluctuation. Failure to plan, is planning to fail.

2) Retirement planning. In this day and age of companies eliminating traditional pension plans, individuals job-hopping, and the lack of confidence in the social security system, the onus is on you to plan for your retirement. With life expectancies increasing, how much money you'll need to save for retirement is increasing drastically. Make sure you are taking advantage of your employer's retirement plan by contributing to the company 401(k), 403(b), or any other company tax deferred plan. Also, if your income allows, consider funding a ROTH IRA, which does not have immediate tax benefits, but can create tax-free income in retirement.

3) Diversification of your investments. Buying ten mutual funds is not necessarily diversification. In the late 90's, people thought that buying mutual funds was 'risk-free' since they were diversified. However, many funds hold the same underlying stocks, so buying funds in the same category (i.e. large cap growth fund) does not do much good. A proper diversified portfolio includes stocks, bonds, real estate and cash. Within stocks mutual funds, you need to further diversify buy investing in funds that purchase large, medium and small companies. Within bonds, varying maturities of bonds and quality, further diversifies your portfolios. Real estate is often best held in real estate investment trusts that produce significant dividends and are often a hedge against inflation.

4) Insurance planning. If you are working hard to accumulate wealth, many unforeseen events can derail the saving plan including premature death, disability, and lawsuits. Life insurance comes in many flavors ranging from the simplest term policies to the more complicated whole life and variable life policies. Disability insurance is important in your peak earnings year, since a significant drop in income, can derail your long-term goals. Also, taking a comprehensive look at your home, auto and umbrella policies is critical.

5) Estate Planning. This area includes estate or death taxes, but most importantly addresses the basics of a will, living will, durable power of attorney, and durable power of attorney for healthcare. All of these documents, when properly drafted, help you make sure your final wishes are carried out the way you want with limited government intervention.

6) Taxes. Most people don't realize that their biggest expense is taxes. An average family will pay approximately 40% of their income to Uncle Sam and to their State.���Proper tax planning includes maximizing your deductions, as well as taking advantage of tax advantaged investments.

Overall, every family situation is different, and certainly your financial goals are different. Getting a financial plan in place to assess your goals and needs is the best way to start the year and become financially fit in the new year.

Moneywise is hosted by Rajesh Jyotishi, CEP, MCEP, CSA, with Shalin Financial Services, Inc. and a Registered Representative of FSC SECURITIES CORPORATION. For questions he can be reached at 770-451-1932,

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