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Improving your financial future

By Randy Neumann

Is 2011 going to be your year?  It has certainly been a tough one, economically, with a 8.7% unemployment rate (more accurately 16% – if you count those who have given up looking for a job), but there’s plenty of the year left, so here are few tips to consider.
No, we’re not going to round up the usual suspects like “write down your goals” or “set a budget.”  Instead, we’re going to look at some, hopefully, new ideas.
Let’s begin by looking at your income source.  How do you earn your money?  If you earn it from a single source, is there a ceiling on it or is there a potential for your income to rise dramatically over the next few years?  A client of mine who was recently laid off by his longtime employer became an entrepreneur in the same industry.  Now, his biggest concern is the ceiling on the amount that he can contribute to his one-man 401(k) (it’s about 40%).
Next, let’s look at your core living expenses, the ones you can’t avoid, such as mortgage, car payments, utilities, etc.  Perhaps you can lower them.  It’s tough to get a mortgage these days, but, currently, the rates are low.  You might want to explore refinancing.  Car dealers are pretty hungry, so you should be able to get a good deal, which might include zero to 2% financing.
Here’s a little thing that can save big dollars – replace your old thermostat with new ones that have timers.  These allow you to set your heating and cooling to your lifestyle.  In winter, you can set the timed thermostat to a lower setting during the day while you are at work, have it warm the house just before you get home, and let it cool the house when you are sleeping at night.  You can do the opposite with the air-conditioning in the summer.
Investing aside, you position yourself to gain ground financially when income rises, debt diminishes and expenses stay (relatively) the same or go down.
Should you pay your debt first?  Maybe not.  If you are a business owner or a professional, for example, you’ll likely always have some debt.  Your ultimate goal should be to build wealth – and you can plan to build wealth and minimize debt at the same time.
Some debt is “good” debt (makes me think of the great line in the movie “Wall Street”: “Greed is good”).  A debt is “good” if it brings in income.  For instance, if you buy a rental property, although you’re paying a mortgage, it’s considered “good” debt because you’re getting passive income from the rent payments and tax deductibility on the mortgage interest.
Credit cards are “bad” debts.
If you are going to be carrying a debt for a while, put it to a test.  Weigh the interest rate on that specific debt against your potential income growth rate and your potential investment returns over the term of the debt.  If the interest rate on that debt looks like it will outpace your income growth and investment returns, then you should really think about paying that debt down fast because you can’t afford that interest rate.
Additionally, paying off your debts, paying down balances and restricting new debts all work toward improving your FICO score, another tool you can use in pursuit of financial freedom (we’re talking “good” debt).
Now, let’s look at investments.  In most cases, you’ll want to implement or refine your investment strategy.  You can’t refrain from investing, even when the bears are out.  Chances are you’re not going to retire on the relatively small elective deferrals from your paycheck; you’re going to retire on the growth that those accumulated assets earn over time, plus the power of compounding.  Investing can also potentially bring you passive income.  Consistent investing, this year and in years to come, has the potential to help you improve your financial life.
You must properly manage the money you make on your way to financial freedom.  It’s amusing: All the Internet gurus tell you they have a method to make you “financially free” or “debt free,” but few tell you how to manage the money you make.  Their not-so-subtle message seems to be “succeed and live lavishly” – if you make it financially, you’ve earned the freedom to blow it all on cars, boats and luxuries.
This is a classic nouveau riche mistake.  If you simply accumulate unmanaged assets, you have money just sitting there open to risk – inflation risk, market risk, and even legal risks.  And, let’s not forget taxes – while not technically a “risk,” they are a threat to your money.  The greater your wealth, the more long-range potential you have to accomplish some profound things – provided your wealth is directed.
If you want to build more wealth this year and in the near future, don’t neglect the risk management strategy that could be instrumental in helping you retain it. Your after-tax return matters even more than your investment return, so risk management should be part of your overall financial picture.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual.  Randy Neumann CFP® is a registered representative with securities and insurance offered through LPL Financial.  Member FINRA/SIPC.  He can be reached at 12 Route 17N, Suite 115, Paramus, N.J. 201-291-9000.

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