Road to personal finance paved with good intentions

This article was written by Nina Swartz (Needleman) for the St Charles County Business Record on January 2003.

Every year, you vow to use the New Year as a fresh start when it comes to your financial habits. Your big picture plan has been to sit down and: (a) write out a budget, (b) save more, and (c) invest more. Your plan has been -- even without a budget -- to pay your bills each month and to apply what's left to savings and investing.

However, real life always interrupts the best laid plans. Your check comes in, you pay your regular bills, you pay the bills for the extra unplanned expenses, and to your surprise and chagrin, once again, there is no money left for any of the "higher" purposes for which you'd planned.

Tips to make this year's results different:

ONE

Make a written plan or budget for how you spend your paycheck. List your fixed expenses like mortgage or rent, utilities, car payment, etc., but keep the following parameters in mind: 10/20/70.

•10 percent -- save 10 percent of everything you earn. Pay yourself first! Make your first "bill" a payment to your savings or investing account. An easy way to do this is to set up an automatic withdrawal from your checking account.

•20 percent -- limit payments for credit cards, department stores, gas stations to 20 percent of what you earn. Pay off all credit each month.

· 70 percent -- live on 70 percent of what you earn. This should include mortgage or rent, car payment, food, taxes, other necessary living expenses. Be able to live on 70 percent of your income.

TWO

Start and build an emergency fund. This saving can be included in the 10 percent guideline above. Ideally this should equal three to six months of expenses. This fund can be used for unexpected car repairs, home equipment replacement, the forgotten prom dress purchase, etc. The concept is to use this fund instead of a credit card to cover nonbudgeted, larger, unavoidable expenses.

THREE

Participate in your employer's retirement plan. Employer sponsored plans, including 401(k)s, Simple IRAs and others, have several compelling features:

(1) Many allow you to put pretax dollars into the plan. So, for example, if you are in the 28 percent tax bracket, that means that it only costs you 72 cents to invest a dollar in the plan.

(2) Many employers will make matching contributions, i.e., they will match your contributions dollar for dollar up to a certain percent. This is a very valuable benefit!

(3) Your contribution can be drawn directly from your paycheck into your chosen subaccounts, eliminating the need for you to remember to write a check and automatically providing the value of regular investing.

FOUR

Take a moment to evaluate your outstanding liabilities, i.e., credit card balances, car loans, house loans, education loans. Which has the highest interest rate? Are you making more than the minimum required payment? How much did you pay in interest on your credit card year to date? What are your real costs including the cost of the interest?

Have you evaluated the feasibility of refinancing your house lately? Refinancing at current lower rates could benefit you in a variety of ways. It could reduce the length of your loan or reduce your payments for the same period loan. It also can allow you to "roll" higher- interest, nondeductible debt into deductible mortgage interest. Consolidating debt has some value but should not be used as a crutch. To meet long-term objectives, you don't want to keep rolling debt; you want to minimize and ultimately eliminate it.

In summary, by just spending a few hours now evaluating and planning your finances, you can gain control of your finances and feel good about them. While others anguish over bills and worry about being able to retire, you can feel proud of your disciplined approach and the progress made towards your lifetime goals!