Get Your Financial Life in Order (Day 1)
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Previously, I had highlighted Fidelity’s Investors Weekly columns as some of my favorite read for a-ha! ideas. One of this week’s articles is a fantastic way to get your financial life in order between now and 2007. I’ll be reviewing one month per day this week.
August
Review your portfolio
I wrote about my update process back in April. It’s a good idea to at least review your portfolio annually, but I like to look at my progress quarterly. Fidelity has many tools to help you analyze your portfolio. I would bet whomever you have for your 401(k) or IRA have similar tools (you do have one of those, right?). Always remember that a diversified portfolio is a happy portfolio.
Check your tax withholding and estimated tax payments
This is a fantastic idea that I sadly do not follow like I should. Many people (ourselves included) over withhold on income taxes in order to get a refund at the end of the year. There are many, many, many people that argue that you are giving a free loan to the government and you can save the money yourself, etc. While that is true, I think that the interest that is passed up is well worth the piece of mind that people get from not having to pay at the end of the year. If you get a $1,000 refund, for instance, and you can get 4% interest on the money and we assume that the money is over withheld equally throughout the year, you’ll be giving up about $20 in interest. That is if you invest all of it. If you spend any (and most people will) then you are giving up even less in interest.
Starting with the 2006 filing season (due April 15, 2007), you’ll even be able to directly deposit a tax refund into an IRA account. This will allow you to not only save for retirement, but will generate a tax deduction for the next year, potentially saving you additional taxes which you can then deposit into the IRA.
If you are concerned that you may be under withheld (for instance, you received a large raise or lost some large tax deduction) you may want to run through a free tool, such as the one from CCH that I pointed out a couple of weeks ago.