Think about what you have been through in the past few months.
The year 2012 ended with the threat of a Mayan-predicted end of the world and the potential to swan dive right off a so-called “fiscal cliff."
Whew. Scary. What a time to be alive huh?
Well, it is time to prepare for the next apocalyptic prediction. The fact is that there will be additional turmoil dealing with the financial stability of our economy, and there always has been. Economies and markets are cyclical and will have “ups” and “downs."
But take heart. The start of a new year is a great time to make a resolution to do three things that will apocalypse-proof your financial life. It is as simple as taking a few moments to Tax Plan, Spend Plan and Invest Plan.
First, since the bill that recently passed to help avoid the “fiscal cliff” will affect the taxes of all Americans in one or more areas, it is a good time to review how much you withhold for taxes from your paycheck. The form used to withhold money from your paycheck is a W-4 form. You would have filled one out when you began your current job. This form and its accompanying instructions can be confusing because the suggested number to claim is based on old tax law information.
Cut through all of this confusion by using a W-4 calculator. This calculator will ask you to input a few things like what you make, how often you get paid and what deductions you take each year. Then it will suggest how many exemptions to claim on your W-4 form. Don’t be surprised if you get numbers larger than the number of people in your household. Remember, the worksheet that suggests, “1 for you, 1 for spouse etc.” is outdated and obsolete. Many websites have a tool like this including (ironically) the IRS website at www.irs.gov. If necessary, make this change with your payroll department.
Do you make the right amount of money? The knee-jerk reaction is always no. But the true answer is always yes. Whatever you make is always the right amount (notice I did not say do you make all you want). But this is an unfair question. The real question should always be “do I spend the right amount of money?” Because whatever you make must always be more than what you spend; and since you can only influence how much you make, you must focus on what you can control: Spending.
If you have not in the past year (or lifetime) sat down for 45 minutes and planned your spending, now is the time. If you have a spouse or other decision-maker involve them as well. Decide how much and by what methods you are going to spend for 2013. This is not always fun but crucial to financial success. You can make it fun by rewarding yourself afterwards with anything from ice cream to an intense workout (to take out any frustrations).
Possibly one of the biggest casualties in uncertain times is a person’s investment portfolio. Not because of market down-turns (which will happen) but because of investor behavior. That’s right. Many end up hurting themselves by being reactionary in volatile times. They fall into a trap of investing and acting on emotion. They accept that there has been uncertainty in the past but claim that “this time it is different." Yet prominent investor Sir John Templeton said that “the four most expensive words in the English language are: ‘this time it’s different."
We humans have a relatively limited experience in life and don’t realize that many similar issues play out each year, each decade and each generation. Those that succeed base their investment decisions on deadlines, not headlines. They decide on a mix of investments based on the time until they need to use those investments (deadlines) rather than on what is currently going on around them (headlines).
So the solution for “Invest Planning” is simple. Make sure that the mix of your investments (i.e. how much of each type of investment) is appropriate for your time frame and all will be well. Look to investment advisors or computer models to help with investment mix suggestions. Add to this a commitment to not be reactionary to headlines and you will have success in 2013 and beyond.
Tried and True Principles
Tax Plan, Spend Plan and Invest Plan not only work in times of uncertainty but they work in any fiscal climate as well. Spend an hour or two each year putting these to the test and you will have many happy “returns."
Shane Stewart is a Certified Financial Planner® at Deseret Mutual. He welcomes your feedback. Or you’re welcome to suggest a topic. Please send your comments to [email protected].