Resolutions for a More Prosperous New Year

With 1989 just around the corner, it’s New Year’s resolution time. This year, consider adding some personal finance goals to your list.

The following common-sense adages of financial planning may sound simple and obvious. But surprisingly, many people don’t follow them. Adopting one or more of them as New Year’s resolutions may not get you rich quick, but they can keep you from getting poor.

- Figure out your net worth. List what you own and what you owe. The difference, if positive, is your net worth. It can tell you where you stand and how far you need to go to reach your financial goals and provide for your financial security.

Don’t forget to include the value of your pensions, company savings plans and other retirement plans. They may be worth far more than you thought.

- Figure out where your money goes every month. Get out your checkbook, bank accounts, credit card statements and other financial documents. List what money came in and how you spent it. If you find you are spending more than you are taking in, or not investing enough of your hard-earned dollars, make the adjustments.

- Refuse to buy anything from strangers selling over the telephone. Telemarketed investment scams are running at record levels, and no wonder. Slick-talking sales crews hawking investments guaranteeing double-digit returns with no risk sound too good to be true. Unfortunately, they usually are.

Precious metals are a prime area for scams, involving anything from shares in phony gold mines to certificates entitling you to non-existent gold bullion. Next time a stranger calls to sell you something that promises the moon, do the easiest and safest thing: Hang up.

- Invest only in things you understand. Many people who get taken in investment scams or who lose money unexpectedly often can’t blame anybody but themselves. They did not fully investigate investments, relying instead on somebody else’s word. This is particularly true in higher-risk investments such as options, limited partnerships and commodities--but also true for “safer” vehicles such as stocks, bonds and mutual funds.

“If you don’t have time to understand something, you’re better off sticking to something you have knowledge of that is completely riskless,” suggests John Markese, director of research for the American Assn. of Individual Investors.

- Make sure your investments are properly diversified. Too many people put all their investment eggs into too few baskets. A good portfolio should contain some stocks, bonds, savings and hard assets like real estate. And it should be diversified within each of those categories, meaning several stocks or bonds or one or more mutual funds. So if all your money is in one real estate limited partnership, watch out. If that investment doesn’t pan out or turns out to be a scam, you could lose everything.

But avoid over-diversification, too, Markese suggests. Many people have too many investments of a similar nature, like 20 mutual funds all investing in aggressive growth stocks. These are overkill, and too hard to track.

- Figure out your risk tolerance and get out of investments that are too risky for your comfort. To evaluate the risks of your investments, Markese suggests the following exercise: Figure out how much your investments can fall in a worst-case scenario. Is that decline more than you are willing to sustain? If so, get into more conservative investments.

But make sure you’re not playing it too safe, either. As long as you have a diversified portfolio with some money in rock-solid savings accounts or money market funds, some money in stocks or stock mutual funds is prudent. They may not do well next year, but in the long run, stocks outperform bonds and savings accounts hands down.

- Understand your investment costs and cut them. Many folks are unaware of sales and service charges, commissions, management fees and other charges on their savings and investments. You may be paying as much as 2% a year to the managers of your money market fund, whereas other funds charge well under 1%. Or any profits you make by timing market swings through frequent trades could be offset by high brokerage commissions.

“Over a long period of time, those fees can really have a significant impact on your portfolio,” Markese says.

- Evaluate your financial planner, broker or other financial adviser. Many investors never question their advisers, and thus don’t really know if those advisers are doing a good and proper job. In some cases, your adviser may even be swindling you.

Here are some questions you should ask about your adviser: Is your adviser objective about investments or always advocating moves that make the most commissions? Does your adviser take time to make sure you understand your investments? Do you receive copies of every document you sign? Does your adviser physically handle your money? (He or she shouldn’t. Your money instead should be handled through a trust, custodial or other third-party account.)

If answers to these and other questions are not satisfactory, get a new adviser.

- Set up a record keeping system for your investments. Good records can help you save on taxes. For example, when you sell some mutual fund shares or stocks, you should designate for sale first those shares that cost you the most. That way you can generate capital losses that can reduce your taxable income.

“People can get tremendous rewards in tax benefits in keeping good records, but they don’t do it,” Markese says.

- Reduce your outstanding credit card debts. Why pay high interest rates for card borrowings when only 20% of those interest expenses will be deductible from your taxes next year?

If you can’t kick the plastic habit, at least resolve to shop for cards with lower rates. Some charge less than 15% and are not hard to find. And if you are among the four in 10 credit card holders who pay off balances before accruing interest, get cards with low or no annual fees.

- Get rid of that fat tax refund. Do you measure your success at tax time by how hefty your refund is? Sure, it’s a big thrill to get a big check back. But in effect what you’ve really done is give Uncle Sam interest-free use of your money for a year or longer. Don’t be such a sucker. Adjust your withholding to where you only have a small refund, or where you will owe the IRS instead.

Do this even if you consider fat refunds to be like forced savings. If you really need to accumulate savings, enroll instead in a payroll savings plan or other regular savings program. At least you will earn some interest on your money, instead of letting the government earn interest off you.

- Review your insurance and avoid unnecessary coverage. Insurance is one of the biggest but least understood family expenditures. Many people, for example, buy too much life insurance. You should get only enough to maintain your family’s current standard of living. And you don’t need life insurance at all if you have no beneficiaries or dependents.

You also may have too much--or too little--homeowners insurance. You generally should make sure it covers about 80% of the replacement cost of your home.

Another common type of unnecessary coverage: Car rental liability insurance. Liability for accidents caused with rented cars is usually included as part of your regular auto insurance liability coverage.