Time to make New Year's financial resolutions
Like many people, you may make some New Year's resolutions. Perhaps you've promised yourself that you'll visit the gym more often or learn a new language or reconnect with a long-lost friend. All of these are worthy goals, of course, and if you achieve them, you may add new dimensions to your life. But if you want to accomplish other major milestones you may have envisioned - a new home, college for your kids, a comfortable retirement and so on - you may need to set some New Year's financial resolutions.
What type of financial resolutions should you make? Here are a few ideas to consider:
Contribute as much as you can afford to your 401(k). Take full advantage of your 401(k) or other employer-sponsored retirement plan. Your contributions are typically tax deductible and your earnings grow on a tax-deferred basis. Every time you get a boost in salary, try to increase the amount going into your 401(k), but at the very least, contribute enough to earn the employer's match, if one is offered. In 2010, the contribution limit for 401(k) plans is $16,500, or $22,000 if you're age 50 or over, although both these limits may increase if they are indexed for inflation.
"Max out" on your IRA. Even if you have a 401(k), you're probably still eligible to contribute to an IRA. A traditional IRA grows tax deferred, while a Roth IRA's earnings are tax free, provided you've had your account at least five years and don't start taking withdrawals until you're 59-1/2. (Your ability to contribute to a Roth IRA is based on your income.) You can fund your IRA with virtually any type of investment. In 2010, you can put in up to $5,000 to your IRA, or $6,000 if you're age 50 or older, although, as was the case with your 401(k), these limits may go higher if they're indexed for inflation.
Rebalance your investments as needed. Over time, your goals and risk tolerance can change. That's why it's a good idea to review and rebalance your portfolio at least once a year, possibly with the help of a professional financial advisor who is familiar with your situation.
Avoid "emotional" investing. Don't make decisions based on emotional reactions to what's happening with your investments. For example, just because the price of an investment may have dropped significantly, it doesn't mean you should rush to sell it. Despite the price drop, it may still have good prospects and it might be an important part of your investment strategy. Consider all factors before making "buy" or "sell" decisions.
Keep sufficient cash in your portfolio. During the long bear market of 2008 and early 2009, many investors discovered that they lacked enough cash in their portfolios. Of course, you need enough cash on hand to meet unexpected expenses without dipping into long-term investments. But beyond that, the presence of cash and short-term, more liquid investments can help reduce the volatility in a portfolio that may sometimes be battered by both the stock and bond markets.
These financial resolutions, like all types of New Year's resolutions, may not be easy to keep. But if you can stick with them, you may have many happy new years in the future.