Financial resolutions for the new year

Posted by on January 7, 2014 @ 11:00 am in personal finance

Like millions of Americans, I make a list of New Year’s resolutions each year that, come March, are all but out the window. This year, it’s going to be different. I’ve already hopped on the treadmill and made some progress on my resolutions to lose weight and get in shape. And I’m going to put a couple of 5k races on my spring calendar to keep me motivated.

Now to my financial resolutions for 2014. Here’s my list:

Increase 401(k) plan contribution. Currently, I put away 6% of my salary and receive a 4% match. Saving 10% overall isn’t bad, but Vanguard recommends saving 12–15% of your income, including any employer contributions. In 2014, I plan to increase my contribution by one percentage point, which will bring me to a total savings rate of 11% in my 401(k) alone.

Blogger Jim Blankenship called on fellow financial scribes to encourage investors to increase their savings rate by 1% in a recent post. I’m giving you a two-for-one, Jim: increasing my own savings rate and, however quixotic, suggesting that others do the same. Better yet: If your plan offers an auto-increase option, you may want take advantage of it.

Fund IRAs. Even though I contribute to Vanguard’s 401(k) plan, I want to continue to make regular contributions to my traditional IRA and then convert it to a Roth IRA. This is known as a “back door Roth.” I can contribute $5,500 annually, plus another $1,000 as a catch-up contribution since I’m over age 50. (Other than qualifying for some senior citizen discounts, I’m still looking for other benefits of reaching the half-century mark. If you have any to share, I am all ears!)

I plan to make my 2014 IRA contribution early this year. And converting to a Roth IRA provides some tax diversification for my retirement assets and serves as a hedge against future tax rates. My colleague Maria Bruno discusses Roth IRA conversions in more detail in this article.

Pare duplicate holdings. Among my mishmash of alphanumeric accounts (e.g., IRA, 401(k), 529, UGMA, and ESA), I have a few holdings that are either very similar or exactly the same. Do I really need to hold a short-term bond fund in multiple accounts? Nope. I plan to prune my portfolio of funds that I consider redundant.

Rebalance. I just rebalanced my portfolio in December since my stock position was about 5% over my target allocation. Periodic rebalancing is a good habit to get into, a case we make in Stocks, bonds, and your portfolio: A (re)balancing act. Should my portfolio stray 5% or more from my established target allocation in 2014, I plan to rebalance again and will do so in my tax-deferred accounts to avoid any tax consequences.

Review insurance coverage. It’s a good idea to take a look at your policies (i.e., auto, home, life, and disability) from time to time. I just added a new car and a new driver, so my rates took a big jump. (No, the new car was not for the new driver!) I took advantage of the good-grade and driver-education discount, and I plan to call my insurance company to determine if there are any additional savings to reap.

Prepare a will. My beneficiary designations are in good shape, but I’ve been procrastinating about drafting a will. This year, I’ll do it, and at the same time, I’ll look into other estate planning documents, such as health care directives and a power of attorney. I read that it’s never too early to get your financial house in order, but it can be too late. In addition, one of Vanguard’s estate planning experts recommends that I revisit my beneficiary designations and how my assets are titled to ensure that they are coordinated with my will.

This is probably the most important item on my list, and the one that has the potential to take a great burden off my wife and children should something unfortunate arise.

Create a financial inventory. I am an organized mess, meaning I could locate bank statements, credit card bills, and homeowner policy without too much digging through the basement file drawers, but I doubt anyone else could. I plan to compile a list of accounts, policies, and other information. Vanguard offers this handy Personal Financial Inventory to record such information in one place.

I’ve set some aggressive goals, but with time, effort, and focus, I am confident that I will keep to these resolutions. I’ll keep you apprised of my progress in a future post. In the meantime, I encourage you to make your own financial to-do list for 2014 if you haven’t already done so.