Create a Financial Roadmap for 2015

December 29, 2014

Hilton Head Monthly
by Dean Rowland

The holidays are over, 2014 is in our life’s memory bank, our eyes are open wide to the opportunities that lay ahead this year, and we can sleep easily at night knowing that all is good.

Right? Probably, maybe, not sure? Sure, you have your New Year’s resolutions firmly in place and are on your way to achieving those lofty goals this month and next. But did you meet or surpass your financial goals last year, if you had any at all? Did you have a financial roadmap or action plan last year to make sure you achieved more financial security, stability and growth than you did the year before?

“Any checklist needs to start with someone’s financial goals,” said John Gugle, a certified financial planner and registered financial advisor and principal at Alpha Financial Advisors in Charlotte, N.C. “What are you trying to achieve with your money? If your goal is to increase financial security, you can do that through larger emergency savings and protecting against risk (i.e. insurance). If your goal is to afford a large purchase, you can do that by prioritizing your spending and saving up for that large purchase.”

If you haven’t done so yet, now is the time to sit down and review your financial status in all areas, including insurance, credit, spending habits, educational funding, emergency funding, estate planning, asset allocation, debt reduction, retirement planning and just about everything that will ensure you know exactly where you stand financially.

“Keeping a budget is paramount to achieving your goals,” said Gugle, who has been a member of the National Association of Personal Financial Advisors since 2006 and has served on its South Regional Board for several years and as its president. He also owns a home on Hilton Head Island. 

“It is the only way you can stay on track. The annual checklist starts with goals, prioritizes what is important, moves to the budget, addresses the means by which you will effect change and lays out the critical path dependencies that must happen to realize success. … The annual checklist is also a valuable document to look at when life throws you a curveball. You might find clarity in your checklist if life serves you lemons instead of lemonade.”

Here’s a financial checklist that might serve as a reminder of what you need to do or serve to awaken you to what you need to do for the first time.

Life changes: Did any changes take place last year that altered your life’s personal and financial landscape? Job change, divorce, more grandkids, health issues or big purchases? Maybe you need to adapt your budget, financial priorities and investment portfolio.

Financial goals: Be honest and assess how you did last year and make the necessary adjustments that reflect income, spending, unexpected contingencies, the ages of you and your family, mid- and long-term commitments…and stick to it.

What’s your net worth? Subtract your liabilities from your assets, and that could be your roadmap for a few years and how you should spend your money. Better yet, want to know what your net worth should be at any age, given common benchmarks? Multiply your age and gross income. The higher the number, the better off you are.
Even if your assets aren’t growing, paying down your debts will help your overall finances. Living within your means is critical. Basic rule of thumb for young people is to allocate no more than 30 percent of gross income to pay for all debt (mortgage, car payments, etc.) Also, for savings, set aside 15 percent of salary early on and then at least 20 percent as you head toward retirement. Make sure you have at least at least three to six months of emergency funding.

Bottom line: Make sure your financial portfolio can support your lifestyle for 20 or more years after retirement.

Asset allocation: Evaluate every investment (stocks, bonds and cash). Strategize to balance risk versus reward by adjusting the percentage of each asset in your investment portfolio based on risk tolerance, goals and window of time.

Investments: Review your return on stocks, bonds, mutual funds, etc. in relation to overall market performances and your expectations. Buy, sell or sit on the bench.

Debt: Make sure you evaluate your debt-to-income ratio. Did you pay down on your credit card debt because you don’t want to keep making interest payments on those purchase advances? If not, do so. Pay the debt off monthly. Just have a handle on what you spend on loan interests to banks, mortgage companies and other lenders: the mortgage, the car payment, the kitchen renovation, the college loans, etc.

Taxes: Maximize the deductibles to minimize the federal and state payments. Take advantage of every deductible for which you’re eligible. Bunch or accelerate deductibles by paying early to reach your deductible threshold. For instance, if you need medical or dental surgery that can put you over the top this year of the 7.5 percent allowable medical expense exceeding your income, do it. That overage is tax deductible. Make sure your withholding and estimated tax payments are in balance.

Can you defer income this year to next or accelerate deductions this year to delay paying taxes until next year? Are you eligible for the Alternative Minimum Tax? Large deductions, exercising stock options or a phasing out of personal exemptions at high-income levels?

Can you contribute more to tax-advantaged vehicles, such as a deferred annuity or 401k, or by investing in tax-exempt bonds or mutual funds?

Just a heads-up. Even though the filing deadline this year is still April 15, no refunds will be issued by the IRS until Oct. 15. A check for the average tax refund of $2,800 per filer will not be in your mailbox or direct deposit account until after that date, regardless if you e-file. This new directive will save the federal government billions of dollars.
Keep all records for documentation.

Retirement planning: For long-term tax-deferred benefits, make sure you max out the allowable contribution at work in your 401(k). If you want to invest more than that for retirement, set up an IRA. Watch that nest egg grow over the years, thanks to compounding. You pay taxes when you withdraw the money years later.
When you do retire, make sure you withdraw money from your taxable accounts first because long-term capital gains are taxed at substantially lower rates than what you pay on withdrawals from tax-deferred retirement accounts.
The majority of us do not calculate what we need to live on once we retire. Big mistake. A simple equation is to put down on paper what annual income you want to live on in retirement, subtract projected Social Security and pension benefits and the future value of current savings. Whatever that gap is in between your wants and future haves is what you’ll need to live a comfortable life in retirement. Basically, you want to establish a guaranteed lifetime income that will complement your lifestyle goals and expectations. Check out

Life insurance: Higher deductibles provide lower premiums, depending on your risk tolerance. Term life insurance is the cheapest and least volatile of all life insurances. Consider a life insurance trust that keeps proceeds from being taxed as part of your estate. Consider an umbrella policy, especially if you have teenagers, because it provides additional liability coverage. Make sure you insure seven to 10 times of salary for life insurance to guard against all future contingencies when spouses are working. Near retirement, lower the coverage and the premium.

Mortgage: Interest rate too high although it’s still at historic low levels? Consider refinancing and how long you plan on living where you are. If it makes sense financially and with fees attached to the new paperwork, adjust the financing terms for an ARM, 15-year or 30-year fixed rate.

Household spending: This is the easiest and hardest to adjust. What do you earn and what you spend and how might that change this year? Obviously, the basic tenet is to not spend more than you earn.

College funding: The sooner you start saving and investing in an investment option of your choice for your children’s higher education, the less you have to worry 15 or five years from now. Consider qualified tuition (section 529), Coverdell Education Savings Accounts (education IRAs) and private loans through federal banks. Scholarships, grants and special incentives need to thoroughly explored.

Estate planning: Of course you have an executor assigned to your estate, but have you named guardians for your children in the worst-case scenario? Is the plan reflective of any changes in the estate tax law? Make sure your wills and trusts are updated and reflect current status conditions. Also look into establishing an irrevocable trust that removes assets from your taxable estate.

Credit cards: All three of the major credit bureaus allow one free report per year. For thorough analysis of your credit status for the entire year, make sure you go online at once every four months with Experian, TransUnion and Equifax to look for errors and evidence of identity theft and obtain your credit score. Also ask your card issuer to lower your interest rate and determine if you need all the credit cards you have without having it hurt your credit score if you decide to cancel one or two of them.

Consider a zero-percent balance transfer from one card to a new one, but only if you can pay off the new balance before the promotion ends.

OK, ready? Get to work on that financial checklist!

Personal Finance by the Numbers
  • 56% of U.S. adults lack a budget
  • 40% of U.S. adults are saving less than in 2011
  • 39% of U.S. adults have zero non-retirement savings
  • 39% of U.S. adults carry credit card debt from month to month
  • 31% of all mortgage borrowers are under water
  • 41% of Baby Boomers do not have a will
  • 50% of Americans with children do not have a will
  • 25 million Americans are underinsured
  • 16% of Americans are very confident that their investments will increase in value
  • 23% of Americans are not at all confident in having a comfortable retirement
  • In 1991 11% of workers expected to retire after age 65
  • In 2012 37% of workers expected to retire after age 65
  • 40% of U.S. adults gave themselves a C, D or F grade on their knowledge of personal finance
Source: National Association of Personal Financial Advisors (most recent statistics available)