Financial Planning for Massachusetts Consumers for 2011
Our Massachusetts bankruptcy clients often ask how to get their financial house in order. Many clients have a 401k or other retirement plan. Others may be completing a bankruptcy discharge and are looking for a life after bankruptcy. Whether you are coming off a Massachusetts bankruptcy or simply refocusing on your financial situation, we’ve put together some initial rules of thumb with some good links to aid our clients and friends.
1. Create a budget: list your expenses, all of them, divide them into fixed (mortgage or rent, car payment, utilities) or variable expenses; analyze where you can cut back on variable expenses short term (and fixed expenses long term)
2. Establish a financial emergency fund – experts differ on how much should be in your fund, with some saying 3-6 months if you have a home equity line of credit you can tap, or longer if you don’t or want to be conservative; this money should be kept in ultra short, low interest rate, FDIC insured money market accounts;
3. 401k, IRA, ROTH IRA accounts – while retirement may be far off, at that time you may not be willing or able to get a second job or cut back on expenses. Social Security http://www.ssa.gov/pubs/10035.html may be reduced. Thus, now, think with the end in mind, as Stephen R. Covey says in The 7 Habits of Highly Effective People. First, max out whatever your employer will match in a pension plan; next review your budget seriously consider putting the maximum matching contribution allowed in your 401k and/or your other retirement accounts.
4. Investing basics – once your money is invested in long-term retirement accounts, you should follow some basic investment advice. First, pay attention to the cost – the annual fees in investment accounts or the fees for mutual funds (basic Vanguard funds charge 0.2% while a typical fund may charge 1-2%; these higher fees can be a huge drag over time). Second, these monies should be managed for long term growth and as a function of your age and risk tolerance; see our article on Massachusetts asset allocation for portfolio basics. Third, stocks (equity), bonds (debt) and other asset classes need to be balanced and rebalanced on a regular basis to fit your needs.
5. Mortgage payments -with interest rates low, seriously consider refinancing as soon as possible; devote savings to emergency fund and retirement accounts; however, be careful, do not use you home as a bank account, refinancing and taking money out when the value goes up – paying off your home should be a part of your long term financial plan;
6. Motor vehicle – evaluate your next vehicle for buy or lease considerations, but, considering your budget fixed costs, see if you can hold our another year or two to reduce expenses, and build up your emergency fund and retirement accounts; in The Millionaire Next Door the authors show that the typical millionaire tends to buy used vehicles and keeps vehicles significantly longer than average.
7. Insurance basics: review your motor vehicle insurance and consider increasing your Massachusetts underinsurance coverage; home owners and rental insurance should be reviewed, updated, and in line with your assets and risks; health insurance should be obtained, and in Massachusetts this is easier than many places; finally, life and disability insurance must be considered to replace income;
8. Get your financial documents organized: Massachusetts wills, durable power of attorney (living will), health care proxy, insurance documents, bank account information, retirement accounts; have copies of all documents “off site” in case of theft or fire; these can be scanned and sent to a relative or friend, and stored online for a nominal fee;
9. RRR: review the above, reevaluate your investments and readjust your portfolios; quarterly and annually.