A year-round workout to get you financially fit

Making a financial resolution for 2007? You’ve got plenty of company. When it comes to top New Year’s resolutions, shedding debt usually runs neck-and-neck with shedding pounds, surveys show.

For all the folks who vow to become financially fit, here’s a month-by-month workout designed to shed economic worries.

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January: Pull together tax records. You’ll need a copy of last year’s return, along with any mortgage and property tax statements, car registration records, receipts for unreimbursed business expenses and deductible retirement plan contributions. If you paid alimony or college tuition or bought a hybrid car in 2006, you’ll also need those records to substantiate your deductions.

Now, either set up an appointment with your tax professional or buy tax software and vow to get the return done by the end of the month, or as soon as you get W-2 statements.

What’s the big hurry when the filing deadline isn’t until April 16?(April 15 is a Sunday this year). About 75% of the nation’s taxpayers get refunds, which averaged $2,264 per household last year. The Internal Revenue Service doesn’t pay interest on that money, so waiting costs you. And, those who file early and electronically get their refunds in days, rather than months.

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February: Pull together holiday credit card bills and tally up how much you owe.

If that’s more than you’ve got -- even after applying the tax refund to your debts -- make a plan to systematically pay off the debt.

The best method: Figure out what the minimum monthly payments are on each card. Add it up. Now consider how much more than that can you afford to pay each month.

Pay the minimums on everything and apply the additional amount to the balance on the highest interest rate card until it’s paid off. Repeat, until your debt disappears.

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March: Check your credit report. Everyone has the right to one free credit report from each of the three major credit bureaus each year. With identity theft the fastest-growing financial crime, everyone should make sure that their records are accurate. Go to www.annualcreditreport.com and click on “Request Report” in the middle of the page. Select all three credit bureaus and follow the instructions.

Minor errors can be fixed by simply writing on the report and returning it to the bureau. But if there are numerous errors or you find credit listed that you don’t know about, you could be a victim of fraud. Go back to the main page at the credit report site and click on “Fraud Alert” in the upper right-hand corner for phone numbers for each bureau.

Be persistent. The process is ponderous but important. If you need additional help because of identity theft, check out www.privacyrights.org. For a tutorial, click on “Identity Theft” on the left-hand side of the page and then click on the “Identity Theft: What to Do When It Happens to You -- A Guide for Victims” link.

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April: Taunt your friends who haven’t already filed their tax returns and play catch with your kids -- or take a walk. Forget finances for a month. There’s got to be some reward for doing your tax return in January.

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May: Start an automatic savings plan. Ideally, you should only do this after you have paid off your credit card debt. With this high-cost debt erased, you can take the money that you had been paying against debts and start socking it away.

Even if you haven’t paid off all that debt, however, it’s not a bad idea to start a savings plan for expenses you know you will face. You can have the money automatically deducted from your checking account, or start a payroll deduction plan with your credit union at work.

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June: Start planning your summer vacation, with a simple parameter: plan to spend only the amount that you’ll have in the savings account that you set up in May. So, if you plan to vacation in late August and are saving $500 a month, you can figure on a $2,000 vacation.

Don’t have enough saved for your vacation? Then look for cheaper alternatives, including staying put. Follow this program, and you might be able to take the vacation of your dreams in 2008.

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July: If you’re not exactly where you want to be with saving and investing, get a notebook and start jotting down every dollar you spend, every day. This will help you see the money pits in your life, whether it’s that daily trip to Starbucks or one too many shoe sales.

You’ll need to cut down on the less important discretionary spending and use the saved funds to pay off bills or sock more money into savings. Don’t make sacrifices that are so tough that you can’t maintain them. Just figure on cutting back by 10% or 20%.

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August: Do a retirement checkup. Many mutual funds, financial services companies and other organizations offer retirement calculators to help you estimate how much you will need. You can find some at CNN.com by going to that site and entering “retirement calculator” in the search bar. My favorite is at https://cgi.money.cnn.com/tools/retirementplanner/retirementplanner.js p.

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September: Consider life insurance. If you have a spouse or children who rely on you for financial support, you probably need life insurance. The amount you’ll require depends on the age of your children, your assets and debts, and your spouse’s ability to pick up the slack.

The bad news is that the younger and poorer you are, the more insurance you’re likely to need. The good news is that term insurance is cheap when you’re young and healthy. A healthy 35-year-old man who doesn’t smoke can get a $1-million policy for about $500 annually. The premium on that policy is guaranteed to stay constant for 20 years.

However, if you’re older or not as healthy, the group insurance that you may be offered at work could be the better deal. That’s why it makes sense to check the rates in September, right before open-enrollment season, to figure out whether to buy life insurance through your employer or on your own.

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October: Consider tax-saver accounts. Two-income families with day-care expenses, and any family with unreimbursed medical or dental costs, should look carefully through their employer’s benefit offerings during open enrollment season for something called flexible spending accounts, also known as tax-saver accounts. These come in two varieties -- dependent care and healthcare.

The accounts allow you to set aside money on a pretax basis for day-care and healthcare costs that you expect during the year.

You’ll still have the same costs, but you contribute to the accounts with tax-free deductions from your paycheck. That means a person who has $5,000 of day-care costs and is subject to a 30% tax rate would save $1,500 by using a tax-saver account.

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November: Do a portfolio checkup. Once a year, you should look at what percentage of your portfolio is in each asset class -- stocks, bonds, real estate and cash -- and decide whether that allocation will meet your long-term and short-term goals.

Short-term goals, like the annual vacation or holiday bills, are best fed with cash. For most people, a home is their primary investment. If you have additional investment assets, planners usually recommend a mix of stocks and bonds to avoid being overly concentrated in real estate.

A rule of thumb is to invest your age in bonds and put the rest in stocks -- international as well as domestic. That means if you’re 40 you’ll put 40% in bonds and 60% in stocks. This rule makes your portfolio more conservative as you near retirement and grow less capable of handling big market swings. You can tweak the formula based on how comfortable you are with risk.

Your main task is to make sure that market swings haven’t vastly thrown off your investment mix. If they have, adjust. If not, pat your portfolio nicely and vow to revisit it again next year.

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December: Spend wisely. Take a look at the money you have left in the automatic savings account set up in May and consider how much of that you’ll need for holiday spending. Vow not to spend more than is in the account. If you can spend less, all the better.

By keeping your spending below this threshold, you can start 2008 without additional debt. Then you can decide whether to use the money you continue to sock into savings for next summer’s vacation, or for paying off auto loans or for college or for a richer retirement. In other words, you give yourself attractive choices. That’s what smart money management is all about.

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Kathy M. Kristof welcomes your comments, but regrets that she cannot respond to every question. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For previous columns, visit latimes .com/kristof.