The arrival of the new year brings both opportunities and financial concerns. Despite the uncertainties that exist, having a solid financial game plan may help you to reach your goals sooner than you thought possible. Consider implementing the following strategies as 2013 begins:
Focus on what you can control: From the fiscal cliff fallout to global economic concerns, there are many things in life we cannot control. Rather than wasting time and energy on things you have no control over, consider shifting your focus to what you can control.
Consider reviewing and refining your approach to saving and spending as these are two areas where you can exert the greatest control. Review your budget for the new year and work to reduce unnecessary expenses and waste. Consider establishing a goal to reduce your expenses by 3 to 5 percent and adjust your budget accordingly.
This may allow you to redirect excess cash flow toward more important items such as building a six-month cash reserve, increasing retirement savings or paying down debt. What better New Year’s resolution than getting your financial foundation in order?
Invest in real estate: The fundamentals of the real estate market continue to improve, making it one of the more attractive investments for 2013. Not only do home values appear to be stabilizing, in some markets they are beginning to increase in value.
Housing affordability still remains attractive and there are some bargains available. In fact, the National Association of Realtors’ Housing Affordability Index, which is based on the relationship between median home prices, median family income and average mortgage interest rates, is still near 2001 levels. These factors coupled with near record low interest rates and declining supply, make real estate a consideration in the new year.
Consider refinancing and reducing the term of your loan: Mortgage rates have continued their decline and remain near all-time lows, making refinancing an attractive opportunity.
According to Freddie Mac’s primary mortgage market survey, the rate on 30-year and 15-year mortgages are approximately 3.35 and 2.65 percent, respectively, down from 3.9 and 3.2 percent at this time last year.
Rates are so low you may be able to shorten the term of your loan without substantially increasing your payment, saving you thousands of dollars in the process. For example, refinancing a $200,000, 30-year fixed-rate mortgage at 5.50 percent to a 15-year mortgage at 2.65 percent would increase your monthly payment by only $154 per month while significantly reducing your term. In fact, you could save nearly $135,000 in interest expenses over the life of the loan — not a bad deal.
Use a Roth and a 401(k): 2013 is a great time to focus on supercharging your retirement savings by utilizing both a company sponsored 401(k) plan and a Roth IRA. For those who are married filing jointly with modified adjusted gross income (MAGI) less than $178,000 or single filers with MAGI less than $112,000, a full Roth IRA contribution of $5,500 is available for 2013 even if you are using a 401(K).
Savers over the age of 50 can add another $1000 catch-up contribution bringing the total Roth contribution limit to $6,500 this year. However, availability phases out for joint filers from $178,000 to $188,000 and $112,000 to $127,000 for single filers.
Remember, while you do not receive a tax deduction for the Roth contribution, the investment along with earnings can be withdrawn tax-free after 59½, assuming the IRA has been open for at least five years. Utilizing a Roth IRA and 401(k) simultaneously can be an effective way to make up lost ground on your retirement plan.
Review your updated credit report: Since many of the money moves you may implement are based on your credit score, consider requesting and reviewing your latest credit report. Generally, it is a good idea to review your report at least once per year. Also be sure to request your FICO score as this will help you to understand what refinancing options may exist prior to going through the application process.
Remember, lenders have minimum FICO targets for different types of loans so you may save yourself some time by having this information in advance. In addition, review your reports for accuracy and consider disputing any erroneous items.
Consider beginning the new year with a plan to address these areas as they may help you to take advantage of opportunities that exist. Since everyone’s situation is unique, consider speaking to your tax and financial adviser to determine the strategies best suited for you.
Kurt J. Rossi, MBA, is a certified financial planner practitioner. He can be reached for questions at (732) 280-7550 or kurt.rossi@Independentwm.com. LPL Financial Member FINRA/SIPC.