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The New Year is the perfect time to set your finances straight with a personal finance guide. Regardless of how you ended last year, you can use this fresh start to set yourself up for financial success in the year to come. In doing so, you must consider how you will plan for taxes, credit and debt and how you will save for the future. Once you have these three areas covered, planning the rest of your finances becomes much easier.
Tax Planning for 2011
Individually, it is important to know your tax bracket and any changes to tax law that may affect you. This year, the Bush-era tax cuts have been extended, so your tax bracket will remain the same if you are earning the same as in years past or a similar amount. Further, a new tax break will appear in your FICA tax. It has been reduced by just over 2 percent across the board. This means you will see a bigger paycheck each month even if you are earning the same. The increase will be substantial for many individuals. To plan effectively, look to the following ways to reduce your individual taxes even further:
- Deposit money into a qualified retirement plan. If your employer does not offer one, consider setting up an IRA.
- Withhold money for a Health Savings or Flexible Spending Account. Your employer may provide this option; if not, all taxpayers are still eligible to open one individually. This allows you to use pre-tax dollars for health-related expenses.
Manage Your Debt and Credit
Your credit follows you for years, but it does not follow you forever. You can make smart choices to improve your credit this year, and you may find some of your past negative reports have even passed their statute of limitations. This means that the creditors can no longer attempt to collect or that, in some cases, the information may be removed from your credit score. Take advantage of this fresh start to make a plan to pay down debts and monitor your credit in the new year. Set a "year end" credit goal and work to achieve it by making regular payments on each of your debts. Further, set a debt goal, maintaining no more than 30 percent of your annual income in annual debt.
Save for the Future
Saving for the future involves both short-term and long-term saving goals. First, start by saving an emergency fund. This should equal three months of your salary in case you are ever unable to work or lose your job. Only once you have put this emergency cash aside can you truly be free to plan long term. Speak with a financial advisor about the future you are envisioning. Do you need to save an education fund for your future children? Or are you past this point in your life and looking more toward retirement? A financial advisor will be able to direct you to an actual figure of how much you will need to save in order to make your financial goals a reality.
Dealing with Debt in 2011
If you are dealing with debt from your past as you head into the New Year, consider this a fresh start to clean your credit report. The goal is not only to improve your score on paper but also to reduce the amount of debt burden you carry day to day. This will leave you feeling far less financially stressed in the coming year. It will also help you better plan for the other financial burdens you may face.
Improve Your Score
Start by reviewing your credit history. Everyone is entitled to one free credit report each year from the service Annual Credit Report. The website https://www.annualcreditreport.com is your source to access this report. Look over your personal credit score and seek out any areas that may be holding you back. Have you missed payments in the past? Do you have too much debt? Do you have a short credit history? Once you know what is causing your low score, you will have a better plan for improving the score. Here are some factors to consider:
- Your credit history (i.e., whether you have repaid debts in the past) is the number one factor in your credit score.
- The length of your credit history is important. There is nothing you can do to improve this except continue to build your credit.
- The amount of total debt you carry when compared to your income will matter. To achieve or maintain good credit, it is best to keep your debt under 30 percent of your income.
- The balance on your open credit lines is an important factor. Aim to keep this balance below 10 percent.
- Credit companies consider the types of loans you have carried in the past. It is best to mix this up between installment and revolving loans.
- Credit report mistakes could be hurting your score. If you notice errors in the report, take steps to have them removed.
Consider Debt Reduction
For most Americans, the number one factor leading to bad credit is too much debt. While smart spending and saving habits will improve this area tremendously, sometimes you need a little more help. Consider debt consolidation if you cannot deal with the payments on your own. Through debt consolidation, a credit counseling or consolidation company will pay off your debts. In turn, you pay the consolidation company monthly installments. In many cases, the consolidation company will be able to negotiate your debt down to a smaller amount than you originally owed, saving you money in the long run. Further, your debts will appear as "paid" on your credit report, improving your score.
Risks of Debt Reduction
Enter into any debt reduction or credit counseling service with great care. First, while there are many good companies, there are several scams or overly costly options. Always do your research into the agency you select. Further, consider the total cost of the option instead of just the immediate relief. If you determine paying off the debts through an agency will ultimately be more expensive, through interest and delays, than paying off the loan yourself, do not use the agency. This can be a hard thing to determine. To do so, always look at details such as financing fees, early payoff fees with your existing lender, interest rates and penalties.
How to Budget and Save Money in 2011
After the lavish holiday season, you may be wondering how to budget and save money in the new year. Even if you overdid it on holiday spending, you can get on track by starting a budget in 2011. Consider this a new start regardless of whether you have practiced good saving habits in the past. Stick with the basics, and you will have your finances on track come this time next year.
Tax Planning for 2011
The new year is the perfect opportunity to decide your small business and individual tax planning strategies for the year ahead. Even if you've never taken time to consider your tax strategy in the past, sitting down and starting anew this year will provide you distinct financial advantages next year. First, set a plan based on your needs and goals at this point in your life. Next, consider which new tax rules and regulations can make those goals more achievable.
Establish Your Financial Needs
At different points in your life, you will have different types of financial needs. For a young professional, saving for a home or a family is important. When you have a family, providing health care and education takes top priority. As you age, saving for retirement becomes more critical. Where are you right now in your life? For tax help, consider how these tax laws relate to your needs:
- The IRS allows you to make a one-time withdrawal from a qualified retirement plan without paying a standard 10 percent penalty if you are using the money for a down payment on your first home or for secondary education expenses for yourself or a dependent. This means a retirement plan is a great tax-deferred backup plan for saving for your future.
- Healthcare Savings Accounts (HSAs) are tax-free options to put money aside for health expenses. This can greatly reduce the total cost you incur in paying for healthcare for yourself and your family. All tax payers are eligible for HSAs in 2011.
- College savings plans can provide you with tax-deferred options to set aside income to pay for secondary education. Each state typically has its own plans.
- When saving for retirement becomes your primary concern, setting aside the highest possible amount of income to your qualified retirement plan is critical. Build an IRA contribution into your monthly or annual budget. You can choose between a traditional or Roth option based on whether you need the savings today or in the future.
Consider Tax Law Changes
Congress extended the Bush-era tax cuts through 2011. This means you will remain in the same tax bracket as you have been in for the past several years as long as your income has not changed. Also reducing the tax imposed on you, Congress approved a 2.5 percent reduction in FICA taxes this year. This reduction can amount to high levels of savings on each paycheck, increasing your realized salary each month.
Consider Stimulus Tax Options
Your tax preparation should always involve becoming aware of tax savings available to you. Take note of recent stimulus initiatives, such as these:
- When filing a tax return, a small business owner can now write off the entire cost spent to open a business in the first year. Capitalizing certain expenses is not required.
- Small business owners hiring individuals out of unemployment situations may be eligible for a reduction or elimination of payroll taxes for those individuals for a limited period.
- Homeowners facing foreclosure have new options to avoid tax penalties on the forgiven loan amount. To determine if you qualify, talk to your mortgage holder or accountant about the Mortgage Forgiveness Debt Act.
