Your Financial Checkup

With the new year bearing down on us, it's time for your annual financial checkup. So step on in to Dr. Foolittle's office and let's see what kind of shape you're in. Don't worry, this won't be painful. We'll keep the poking and prodding to a minimum, and we'll do our best to make sure the instruments aren't cold.

If this list looks too daunting, just take it one step at a time. And if you don't want to go it alone, get some unbiased, professional advice about your finances with TMF Money Advisor

Diagnose your spending habits
What do you know about your consumption? We're not talking about devouring your grandma's liverwurst-on-a-stick -- we're talking about your spending.

  • Do you know how much you spend on groceries? On books? On utilities? If not, fire up that spreadsheet and start recording your expenses. You can visit the "How Much Am I Spending" calculator for a list of categories, and it'll even count the beans for ya. Review your checkbook, bank account statements, and credit card statements and start filling in the blanks. If you're someone who doesn't deal much in cash, then a review of the past three to six months' worth of information may provide the pulse of your spending.

  • If you find yourself faced with a lot of "$100 ATM Withdrawal" items in your history, you'll need to do a little more work to see where you've been indulging. Try this: Every time you use cash, keep the receipt. If the receipt doesn't list what you purchased, write it on the receipt. Every night, put the receipts in a jar. At the end of the month, enter the items in your expense-tracking spreadsheet, and you'll know exactly how much you've been spending on Fang, your pet gerbil.

  • Want to know how much you could add to your retirement by curbing your spending? This calculator can show you. For example, if a 40-year-old cut $100 from her monthly food budget and invested it in a tax-deferred retirement account, she would add $145,346 to her nest egg (assuming a 11% annual return) by the time she retires at 65. Give it a try yourself. The results might inspire you to find more places to trim the fat.

  • Once you have a handle on your consumption, put yourself on a diet (i.e., a budget). You can purchase budgeting software, and there's always Quicken and Microsoft Money, which have budgeting features. Keep in mind that, with budgets, simplicity is best. An example is the envelope method: Every month, each category (food, clothes, entertainment, ego enhancement) gets its envelope filled, and that's all you're allowed to spend until the next month.

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Regulate your retirement
The prescription for healthy, active golden years is making sure you do a little bit on a regular basis over the long haul. (This also guards against the heart attack suffered by those who reach retirement age with no savings and realize how little Social Security provides.) It's a race of endurance. So, how is your retirement regimen?

  • Are you on track to have enough at retirement? Go through this obstacle course and find out. If you're behind, the time to pick up the pace is now!

  • If you'd like to step up your retirement savings and you haven't contributed the maximum amount to your 401(k) this year, check with your plan administrator to see if you can make a "catch-up" contribution. Some plans allow this, but many don't. You have until December 31 to make year 2001 contributions to your 401(k). You have until April 15, 2002 to make year 2001 contributions to an Individual Retirement Account (IRA), but since time in the market is important, it's best to make your investment sooner rather than later.

  • Speaking of IRAs, do you know which is better for you, a Roth IRA or a traditional IRA? If not, go through this exercise. Not sure about the differences? Run through the All About IRAs gauntlet.

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Inspect your insurance

You hope you'll never need it, but when you do, you're glad it's there. As Paul Commins (TMF Buster) says in the introduction to the Fool's Insurance Center, "No matter how diligently you build your financial empire, failure to purchase adequate insurance can put you in a desperate hole in a heartbeat."

  • Is your life insurance coverage sufficient to take care of your family? Now is the time to look at those needs, particularly if you've added a child or two to the family circle since you purchased coverage. If you decide you do need more insurance, then think about a term policy that lasts for up to 20 years. It will provide far more coverage for the same premium dollar than anything else.

  • According to the Social Security Administration, the average 20-year-old worker has a 30% chance of becoming disabled before retirement age, whereas that same worker has a 17% chance of dying before retirement. Conclusion: Having disability insurance is just as important as having life insurance. You might already have some through your employer, so ask the Human Resources guru in your office. Once you know how much your employer provides, determine if it's enough.

  • If your car is three or more years old, increase the deductible on the collision and comprehensive coverage to $500 or $1000 to obtain a lower premium on your car insurance. You might think about dropping that coverage altogether on cars older than five years. As a car gets older, it declines in value. Your insurance company will only reimburse you for its fair market price, as determined by standard rate books. Thus, the premiums for such coverage may not buy you as much protection as you think.

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Examine your debt
Not all debt is bad. The good kind can be in the form of a mortgage or a school loan. However, some debt can infect your finances and debilitate your net worth. This kind is usually in the form of plastic.

  • As explained in the Fool's Getting Out of Debt opus, the average credit card has a balance of $5,800, with an interest rate of 18.3%. That results in annual payments of $929.70, after tax. In other words, someone in the 28% tax bracket would have to earn $1,291.25 just to pay the interest on that debt. If this scenario bears any resemblance to your life, make eliminating debt your top financial priority.

  • There's another important aspect of debt: your credit history. Your ability to manage debt will affect the terms on which you borrow money in the future, for a home, a car, a small business, or your kid's education. It all comes down to your credit report, and all Fools should check theirs out. You might owe money you forgot about, or someone might think you owe money that you really don't. Get your report through any of "The Big Three" agencies: Experian, Equifax, and Trans Union. Or, you could order a report from all three in one easy step at TrueCredit.com.

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Next: Banking, Investments, Taxes »


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