I consider myself a realistic optimist, and I usually see the glass as half full. Rebounding housing markets, especially in the Bay Area, fiscal cliff avoided (for now) and modest gains in the stock markets make me think that 2013 won’t be all that bad.
However, given the daily whiplash created by the financial markets (first it’s up, then it’s down) I see 2013 as a year to clean up your financial house and get your family poised to take advantage of the slow paced market recovery. Here are the Top 5 financial moves you can make this year:
- Shore up your Emergency Fund and make sure you are earning at least 0.75% interest. Do not let your cash sit in your savings account earning 0.1-0.25% interest. If you have a well funded Emergency Fund to cover 6-8 month’s worth of expenses, you are missing out on $500+ in interest income each year. Check out Capital One 360 (0.75%), American Express Savings (0.85%), and Ally Bank (0.9%). Directly link your high yield savings account to your checking account. Keeping a large amount in your everyday checking or savings account can result in spending more than you should.
- Pay Attention to your Retirement Accounts. Consolidate all your old retirement accounts that you have ignored for years into a Rollover IRA. Go with a low-cost provider like Schwab, E*Trade or Vanguard. Invest the cash in a well-diversified array of low-cost Exchange Traded Funds like: Schwab US Large Cap (SCHX), iShares Mid Cap ETF (IJH), iShares Small Cap ETF (IJR), and Pimco Total Return ETF (BOND). Since retirement investing has a long time horizon, International and Emerging Markets has a place in your portfolio as well. I like Wisdom Tree Emerging Markets Equity (DEM). Also, do not ignore your current retirement plan at work. You should know how much is in your account and where it is invested.
- Make sure you are maximizing your pre-tax contribution to your 401(k), 403(b) or 457 at $17,500 (for 2013). Do not miss out on the opportunity to maximize pre-tax contributions to your employer sponsored retirement plan. Each individual can contribute $17,500. Any employer contributions are made on top of your contribution and do not count towards the $17,500 limit. Retirement is your largest financial goal, so do not skimp here!
- Take control of your cash flow. You should know how much you spend each month. On average in the Bay Area, a family that owns a home and has children in childcare spends $12,000 per month. How much do you spend? Managing your cash flow and living within your means is how you achieve your financial goals and accumulate wealth.
- Learn about investing. The #1 action you can take is to understand the fundamentals of investing. This will give you a basic understanding of why you invest differently depending on your financial goals (e.g. Emergency Fund versus College Savings). Building wealth takes patience and an understanding of your money. Check out CNN Money 101. With 23 helpful lessons and quizzes, you will gain knowledge that will help you for a lifetime.
The optimist in me sees 2013 as an opportunity to put your money to work and reap the benefits of compounding over the long-term; the realist in me thinks there will be very little meaningful gains in the short-term and to expect little value creation this year.
Katy Song, CFP, focuses on comprehensive financial planning for families with young children and couples starting their lives together. You can contact Katy at firstname.lastname@example.org , visit her website katysong.com, or follow her on twitter @katydavissong. She lives in Mill Valley with her husband, 5 ½ year old daughter and two year old son.