Sure, most New Year’s resolutions are forsaken within a month. But here are a couple of practical resolutions for improving your financial outlook that will pay huge dividends down the road (and be easier to keep than taking off those extra pounds).
Reduce debt. Yes, this is such conventional wisdom as to seem trivial. But there is virtually no other factor than influences the security of retirement more that the elimination of debt by the end of your working years.
Start with a review of your credit cards. If you are carrying balances from month to month, this is the place to focus upon most intently in 2015. Many families making only minimum payments are dismayed to learn that they are barely covering interest expense and are not making any progress toward paying off the balance. Make an affirmative plan to increase your monthly payments and curtail additional charges to begin exterminating these high-cost financial blood suckers. And track your progress each month against the plan in order to keep up the momentum.
Assuming your credit cards are under control, turn your attention to your mortgage. When is your current home loan due to be paid off given your present payment schedule? If it is scheduled to continue into retirement, consider getting more aggressive now.
Now is the time to refinance if you have not yet done so. Mortgage rates are still at historic lows, especially for shorter-term 15-year loans. Be sure to maintain discipline and avoid the temptation to take cash out if you do refinance; remember that the objective is to pay down the balance faster. And even if your mortgage is under water, the government-sponsored HARP program may still allow you to successfully refinance and is worth a look to see if you qualify.
In the event that you cannot refinance, consider increasing the amount or the frequency of your payments. Any additional amount above the scheduled monthly payment goes directly to reducing the outstanding balance and shortening the payoff time. Kicking in an extra $100 per month could knock six years off a $150,000 conventional 30-year mortgage.
Tune up investments. It is important to rebalance your portfolio periodically. Each year, some sectors or asset classes outperform others, causing your allocation to stray from your target. For example, high- grade bonds performed unexpectedly well in 2014 and could occupy a disproportionately high share of your portfolio today.
For many people, assets in a retirement plan at work comprise a significant proportion of their investments but receive relatively little attention. Allocation decisions made years ago but never revisited can produce unpleasant results.
If this describes you, resolve to get some advice and rebalance the funds in your retirement account. Most 401(k) plans offer online assistance with fund selection as well as a toll-free access to a consultant at the plan custodian or administrator. Take advantage of these resources to update your fund allocation at least once a year and preferably more often. If you don’t know where to start, contact your HR department for more information on the plan.
Finally, make sure you are getting the full benefit from your employer’s plan. Find out if your company matches your plan contributions and if you are getting the maximum match. If not, make every effort to ratchet up your contribution to take advantage of as much free money as you can.
Eating your broccoli or hitting the gym more often? Great. But follow through on these financial objectives and you will be well on your way to a secure retirement.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.