Forget those last five pounds—New Year resolutions for 2010 should be aimed at getting your financial life in shape.
You wouldn’t buy a house without going through the numbers with a fine toothed comb. You should use the same practicality when defining a realistic education plan.
SANDRA PROULX, EDUCATIONGRANT.COM
If the economic downturn has taught us anything, it’s that it’s time for a back-to-basics approach to your finances. Conventional wisdom is easily dismissed as too staid, especially when the markets are on a roller-coaster ride. But we found five financial truths that will be particularly important to embrace in 2010. Here’s what they are and how to make the most of them.
Invest overseas
You already know that investing overseas provides needed diversification from the whims of the U.S. stock market. But planners are urging clients to take a closer look at international stocks for their growth opportunities, and not just as a buffer.
Mature markets like the United States and Japan simply don’t have the growth potential other countries do, says Douglas Rice, a personal finance educator and author.
“There’s simply more demand and more room for developing countries to grow,” he says. “In China as of 2008, there were only 50 people out of every 1,000 with cars. In the U.S., for every 1,000 people, 765 owned cars. Americans will need to replace their cars eventually, but that’s a totally different demand curve than pushing out millions of new drivers every year.”
Chris McDermott, Fidelity Investments Senior Vice President of Investor Education, Retirement and Financial Planning, agrees that going international makes sense, provided investors’ timelines are long enough: “Foreign stocks generally reduce a portfolio’s risk over the long term, but can increase risk in the short term.”
So what’s the right balance? McDermott says putting 30% of your stock allocation into foreign companies provides nearly all of the diversification benefits that a 40% allocation does, with less risk.
Investing overseas isn’t as daunting as it may sound—beginners can start with a diversified international mutual fund that invests in stocks from countries all over the world. Those comfortable taking on a little more risk can find funds that focus on emerging markets—in a broad emerging markets fund or a fund that invests solely in one region or country. These funds typically are higher-growth but somewhat more unstable. More sophisticated investors can buy stocks directly on foreign exchanges through a number of trading platforms, including E-Trade and Fidelity.
Read your statements
Buy-and-hold investing is alive and well, but that doesn’t mean you can ignore your portfolio. To make the most of changing opportunities, review your investments every few months. That’s not to encourage day trading or other needless—and costly—tinkering, but in an erratic market such as we’re likely to see in 2010, it pays to keep a closer eye on your strategy and ensure it still makes sense.
Evaluate your portfolio on your own schedule. “Your review should not be driven solely by the calendar,” McDermott says. Any big life changes warrant a review to see how your current investments are positioned versus your target investment mix, timeframe, risk and financial tolerance.
Scale back college expectations
In case you hadn’t noticed—and, if you have kids, you’re wearing impressive blinders—college costs are soaring. Recent statistics put the average annual cost at private schools at $25,143. Moreover, many “elite” colleges and universities exceed $50,000 in total yearly cost. The result: Two-thirds of college students take out loans to meet the expense of higher education, boosting average debt at graduation to more than $23,000, according to a National Postsecondary Student Aid Study.
Time to ramp up
529 savings
Weary investors are fleeing college savings plans. Here’s why you should do the opposite.
Discouraged? Don’t be. Instead, focus on the cost versus the benefit of your child’s college options to get the most bang for your education buck.
“You wouldn’t buy a house without going through the numbers with a fine-toothed comb,” says Sandra Proulx of EducationGrant.com, a site geared to helping students find financial aid resources. “You should use the same practicality when defining a realistic education plan.”
Make sure to do some comparative shopping when considering which college makes the most financial sense. Strategies include:
Community college. These can be a fraction of the cost of going away to school—climbing enrollment at community programs throughout the country attest to their growing popularity.
Start at a local school, then transfer. That can trim the overall expense of a “prestigious” degree.
Consider three-year programs. Colleges such as Hartwick in upstate New York have unveiled intensive programs that let students graduate in three years, saving thousands of collars.
Think career, not just school. “Have you researched the career that interests you? What’s the average pay? How quickly after graduation will you be able to pay off any student loans you take out?” says Proulx. “Will this industry still need workers once you’ve graduated? If you can’t afford it without big loans, choose another school.”
Tap your home equity—carefully
Back in the days of easy mortgages and soaring property values, banks were practically begging homeowners to tap their home equity via loans and lines of credit. And we certainly indulged, using them for everything from dream vacations to cash for home repairs.
No more. Not only are lines of credit harder to come by, lenders are routinely freezing existing lines because plummeting property values can’t support them. Even if that’s not the case, some lenders are freezing existing lines of credit due to inactivity.
So if you have a functioning line of credit, don’t leave it completely unused. That’s not license to spend, though: “No one should treat a line of credit as emergency cash,” says Rebecca Schreiber of Solid Ground Financial Planning in Silver Spring, Md. “Use it so that they’re not shut down from inactivity. Automate a bill onto a line of credit, then have your bank automatically pay off the credit account each month. Not only will the line of credit stay active but the regular timely payments will increase your credit score.”
Challenge property taxes
Savvy homeowners have always been careful not to overpay their property taxes.
Now that strategy makes particularly good sense. Although conditions have stabilized somewhat, many homeowners continue to struggle with their property values. According to the National Association of Realtors, the national median price for a single family home was $177,900 in the third quarter of 2009—11.2% lower than the same period the prior year.
That may be lousy news if you’re trying to sell but it’s music to your tax-paying ears. For example, if you bought a house for $500,000 in 2006 with a property tax rate of 1%, that’s roughly $5,000 a year. If your property is now only worth $400,000—a typical drop in many parts of the nation—you’ll save $1,000.
Don’t wait for the county to point out your newfound savings, says Dan Koblin, senior financial planner with Pinnacle Financial Group in Los Angeles.
Request that your property be reassessed. If you don’t get the break you think you deserve, follow up. Make sure the assessors are aware of any changes in your home that may negatively affect value. See how your home stacks up to comparable houses in your neighborhood. You can find similar homes and their worth at your local assessor’s office.
