Making promises you can keep

Your Money

February 04, 2007|By Humberto Cruz | Humberto Cruz,Tribune Media Services

It's not too late to make New Year's resolutions that stick.

By now, I expect that millions of Americans will have broken their New Year's resolutions, including the ever-popular but vague "saving more money" and "getting my finances in order."

So why not start fresh and make new and specific resolutions you actually keep? Here are some ideas:

Dig up your most recent checking account statement and see how much you forked over to the bank on monthly service charges, automated teller machine fees and any other charges, such as for insufficient funds (that is, bouncing checks).

You could discover you are wasting hundreds of dollars a year you could save by shopping around for better terms (perhaps even at the same bank with another type of account) or by managing your account more carefully.

Check your credit-card statements - most card-carrying Americans have more than one - and see which one charges the highest interest rate. (The statement might use the term "daily periodic rate" to refer to the interest rate.) Check out other fees such as for late payments or cash advances.

If you carry a balance, make a list of how much you owe and how much interest you are being charged on each card. Then make it a priority to pay off the card that charges the highest interest rate. If you can't pay the bill in full, at least commit to sending "x" amount of dollars above the minimum payment each month. When you are done paying off this card, move on to the remaining card or cards with the highest rate.

And when you are done with all, resolve to always pay your credit-card bill in full.

Next, look over the most recent statement for your 401(k) or other employer-sponsored retirement plan.

Check how much the statement says you are contributing, how much if anything your employer is contributing, where the money is invested and whether the account value has gone up or down since the previous statement. If anything does not seem right or is not clear, ask the person in charge of the program to explain it to you.

In particular, make sure you understand the investment options. If you see an option called life-cycle (or sometimes lifestyle) fund, it means a widely diversified fund that invests in a variety of asset classes such as stocks, bonds and cash, and that typically becomes more conservative as you grow older. Verify whether this last point is true for your fund.

A life-cycle fund is designed to be a convenient, one-stop investment for your retirement plan. If you pick it as investment option there is no need to put any of your money in any other option, and it might actually be harmful to do so.

Some surveys, however, show that many employees do not understand the purpose of a life-cycle fund. They split their contributions evenly among the life-cycle fund and the other options, mistakenly thinking they are achieving broader diversification.

But depending on what the other options are and how many there are, such a split may lead to portfolios that are not at all diversified and may be far riskier than the employee realizes.

Go back to the first and second resolutions.

With all the money you will save on bank fees and credit-card interest charges, contribute to an individual retirement account.

An IRA is a tax-favored retirement account you can open at any number of financial institutions, including banks, mutual fund companies and brokerage houses. The maximum contribution is $4,000 for both the 2006 tax year (you can contribute any time through April 16) and 2007 tax year (you can contribute any time through April 15, 2008). People 50 and over can make an additional $1,000 "catch-up" contribution each year, for a total of $5,000.

Based on my reader mail, many people think they can't open an IRA because they don't have $4,000 or $5,000. But that's the maximum contribution. There is no legal minimum under IRA rules, although each financial institution can set its own.

As a practical matter a few hundred dollars is all it takes at many institutions to open an IRA. Once you open one, you'll receive the most benefit if you contribute regularly.

Humberto Cruz writes for Tribune Media Services.

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