Step by step: A few key moves can get finances on track

FinanceBusinessJobs and WorkplaceRetirementFamilyCompensation and BenefitsSocial Issues

Just what you need--a few more New Year's resolutions.

If you've already given up on the promise you made to get into shape, perhaps you can try to make your finances a little healthier. And if you are still at it on your workouts or weight-loss program, keep in mind that getting the basics right on your finances can be a lot like losing weight--the hardest part is getting started.

When you put the financial fundamentals in place and feel more secure about taking care of yourself and your family, you should give yourself the positive reinforcement you need to keep on going.

Try these:

-- Start an emergency fund.

You've probably heard this hundreds of times before, kind of like "eat your vegetables."

But think about it: You need an emergency fund if every time a surprise expense comes up, you have to add money to your credit card balance, or if you do it for expenses as predictable as tires for the car or athletic equipment for the kids. You need a regular stash of cash to fall back on so that a $2,000 credit-card balance doesn't turn into $3,000 or $5,000.

Keep in mind that when you let your balance snowball, you are buying the tires or shoes over and over again. That's interfering with paying for your next car repair. Try the "How much do you owe?" financial calculator at www.myvesta.org to see what your debt is doing to your future. If you have a credit card charging 18.9 percent, and $5,000 in debt, you will end up paying $14,564 if you pay $100 a month.

Meanwhile, if you are living paycheck to paycheck, you are taking chances in an uncertain job environment. Although the job market is currently strong, many economists are expecting it to weaken this year.

The rule of thumb among financial planners is to have at least three months of pay set aside just in case you lose a job. Don't try to get there all at once, or you could be discouraged and let this resolution go. If you have saved nothing now, start with an amount you think you can manage--perhaps as little as $10 or $20 a week if you can keep it going. Put it in one of the high-paying savings accounts you can find at Bankrate.com. For example, you can earn more than 4.5 percent on savings at HSBCdirect.com or INGdirect.com. Set up the account so your money flows automatically from each paycheck into a savings account.

To find some quick and easy savings, read "101 Ways to Cut Expenses" by Deerfield, Ill., financial planner Sue Stevens on Morningstar Inc.'s Web site. As you review it, you may be surprised to find how easy it is to cut out costs. Consider expenditures you won't miss, total up your potential savings, and divide that in half. You can use a portion to fund your emergency fund and the rest as extra monthly payments on your credit card debt.

Another simple source of savings can come from adjusting your withholding on your paycheck. Instead of waiting for a large refund on your taxes each year, take home more pay and channel it into savings throughout the year. Why let the government hold your money for you without paying any interest when you can earn 5 percent on your savings immediately?

Keep in mind that when planners say to have three or even six months of pay set aside in an emergency fund, they mean take-home pay--not gross income. And when calculating the figure, subtract from it any sum you normally save for retirement or anything else. Obviously, if you lose your job, you can give up saving for a while.

Also, if you have a home, but not a home-equity line of credit, open one while you have a steady job. But don't touch it. It's your emergency fallback in case you lose a job and need to draw on money beyond your savings.

-- Get insurance, but don't overdo it

No matter what your age, you'll want to have health insurance if at all possible.

If you think you are young and can skip it, consider a muscular 25-year-old Minneapolis garbage collector who ended up in bankruptcy a year ago following a car accident. After being rushed to the hospital and treated for a couple of broken bones, he was left with thousands of dollars in medical expenses he couldn't handle, and a job he couldn't do.

Besides health insurance, consider disability insurance--especially if a spouse or children are depending on your income. With disability insurance, an insurance company will provide money if you become sick or are injured and can't work.

Employers often provide insurance that covers 60 percent of a worker's pay, and some let you boost the amount of coverage through relatively small extra monthly payments.

Life insurance is also necessary for families, but not the whole life or universal life policies that pay insurance salesmen large commissions. Financial planners who do not depend on commissions from insurance generally encourage parents to hold term life insurance, which is cheaper.

Life insurance needs vary. For example, Overland, Kan., financial planner Sheryl Garrett suggests that if one parent is staying home with a child, term life insurance should be enough to cover child-care expenses and household debts while the surviving parent works. That might be about $250,000 in coverage, she says.

At Smartmoney.com, you can research "How much life insurance do you need?" and "How much disability insurance do you need?" Find them by clicking on "personal finance" and "insurance."

-- Save for retirement

When children are grown and out of the home, parents may be able to cut back on insurance to provide more cash for savings, Stevens said.

In 2007, people 50 and over can contribute up to $20,500 to a 401(k) and $5,000 to an individual retirement account or Roth IRA.

Yet waiting until you are in your 40s or 50s to save for retirement is likely to leave you far short of the money you will need, especially if your employer doesn't provide a guaranteed pension.

Do a "ballpark estimate" at www.choosetosave.org to make sure you are saving enough for retirement. In 2007, people under 50 can save up to $15,500 in a 401(k) and $4,000 in an IRA.

-- Have a will and tidy records

Estate planning attorneys say that while people would prefer to avoid thinking about their death or an incapacitating illness or accident, they must so they can write a will and a durable power of attorney for health care and property.

A will, of course, states where assets will go upon a person's death. Parents with dependent children need a will to designate guardians. The power-of-attorney documents allow you to specify who will make medical decisions on your behalf or handle your financial matters if you become unable to do so.

Yet AARP has estimated that about 40 percent of people over 45 do not have a will. And estate-planning attorneys say people give their heirs additional pain when they die without leaving a will and neat records.Heirs should know where to find complete records, including a list of all investment accounts, insurance policies, real estate, pensions and any other financial assets. The list should contain a contact person for each account and the location for the paperwork.

Financial planners who have dealt with family deaths say details cannot be overemphasized. For example, after certified public accountant Mark Kaizerman's father died a few years ago, he struggled even though his father had planned extensively. As a result, Kaizerman wrote a book, "Beneficiary Directory: One File. One Location. One Call." He said people don't realize that documents such as military discharge papers, adoption papers and divorce decrees can become critical for spouses or children.

For example, he notes a military discharge may be necessary for a military funeral and a marriage certificate may be necessary to draw a husband's pension.

Copyright © 2014, Los Angeles Times
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