5 Ways to Turbo Boost Your Savings in 2017

MONEY TALKS – Achieving your goals and aspirations may be closer than you think. Saving is the foundation to any good financial plan. Follow these five steps to boost your savings to the next level!

  1. Max Out Your Retirement Plans – In 2017 you can defer up to $18,000 of your salary into an employer sponsored retirement plan such as a 401(k), 403(b), or 457 plan. If you are age 50 or older, the IRS has a special “catch-up” provision which allows you to contribute an additional $6,000 for a total contribution limit of $24,000. If your employer doesn’t offer a retirement plan you may still be eligible to contribute to a Traditional or Roth IRA. The IRA contributions limits for 2017 are $5,500 or $6,500 for those age 50 or older. If you didn’t maximize your IRA last year there is still time. The Internal Revenue Code has a special provision permitting you to make a 2016 contribution up until April 17th of 2017.
  1. Know How Much You Are Spending – Most people have no idea what they are actually spending. While some bold participants may blurt out a response when asked, in my experience what people say they are spending and what they are actually spending are two very different numbers. A good back of the envelop approach to calculate your spending is to look at your final pay check for 2016. Take your year to date gross pay and subtract any taxes paid as well as any employee benefits such as medical, dental, and retirement contributions. This in effect is your take home pay. From there subtract any additions you made to long term savings accounts throughout the year and you have calculated your annual spending. Most people are surprised by how much they are spending. Now that you know how much you’re spending, keep any eye on major outflows and set up an automatic transfer to your savings account to ensure some money is put away before hitting your pocket.
  1. Review Your Investment Portfolio – When it comes to determining an appropriate asset allocation, most people take the set it and forget it approach. Meaning they randomly picked some stock and/or bond mutual funds when they enrolled in their employer retirement plan, and they have not looked at it since. For many of us this could be 5, 10, or even 20+ years. Review your most recent portfolio statement to see if your current allocation is still appropriate for your age. Traditionally younger investors can be more aggressive and allocate a higher percentage of their portfolio towards equities. On the other hand, seasoned investors whom are approaching retirement may want to reduce their risk by diversifying into more bond funds and less stocks. If your current asset allocation is appropriate for your age, be sure to rebalance your accounts annually to make sure your portfolio stays properly aligned.
  1. Take Responsibility – The glamorization and/or demonization of politics and economics by the media can be hard to ignore because they are on the face of every TV station, newspaper, and social media site. Nonetheless, it’s essential to remember that for the most part these situations are out of your control. However, that doesn’t mean you should sit idly by and hope for the best. To use a weather analogy, while you don’t have control over when the next snow storm will hit, you do have the ability to buy snow tires for your car, a new shovel, and salt for your driveway. By personally managing the internal factors in your life such as; how much you save, your consumer loan balance, and the size of the home you purchase, you are taking responsibility over the aspects in your life that allow you to control your own financial destiny rather than taking a back seat to external factors over which you are powerless.
  1. Invest in Yourself – Many people don’t realize that the greatest financial asset they have is themselves; i.e. their ability to earn a living. Investing in post-secondary education, technical training programs, and advanced degrees go a long way toward building a complete resume. Combine these skills with quality work experience and you have just positioned yourself for a financially rewarding career.    

It’s All about Your Asset Allocation

MONEY TALKS

Asset allocation is the concept of diversifying a portfolio across several asset classes to reduce the portfolio’s exposure to risk. Your asset allocation is critical to the success of your portfolio because it is the driving factor that determines both risk and return. While the specific investment selections you make are important, they are far less crucial than the amount of money you commit to each asset class.

Creating a proper portfolio is a two-step process. The first step is selecting an asset allocation that is aligned with your needs. The second step is selecting the specific investments that fit into the asset classes you selected. Identifying your personal and financial needs is an essential step towards selecting your asset allocation. Traditionally a young investor can be more aggressive than an investor in their sixties because they have time on their side to overcome a market downturn. However, that is not always the case. Your health, job security, cash flow needs, and risk tolerance are all important factors that should be considered when selecting an appropriate asset allocation. The point is, your portfolio should be unique to you and your situation. Just because you and your neighbor are the same age doesn’t mean that you should have the same allocation. Likewise, your allocation at 25 will likely be inappropriate for you at 55. Find an asset allocation that works for you and your current situation and update it as your circumstances change.

Selecting specific investments that fit into an asset class can be a challenge because of the level of detail involved. Asset classes are broad categories of dissimilar investments such as stocks, bonds, real estate, and money market funds. Each asset class can then be divided into specific categories. For example stocks can be divided into U.S. stocks and foreign stocks, while bonds can be divided into taxable or tax-exempt. These specific categories can then be divided again into different styles. U.S. stocks can be divided into small, medium, and large cap. Bonds can be divided into investment-grade or below-investment-grade. This division can go on and on until you have narrowed down a broad asset class into a specific category, style, and sector such as U.S. small cap health care stocks. With thousands of investments to choose from one might ask; how can I possibly select investments that represent all these asset classes, categories, styles, and sectors?

Thankfully there are investments out there that allow an individual investor to create a broadly diversified portfolio at a reasonable costs. Index mutual funds and exchange traded funds (ETFs) are an excellent tool to build a portfolio that has an appropriate allocation where the specific investments fit into the appropriate asset class, category and style. The nature of these funds allow an investor exposure across broad market segments without the time, energy, and cost of purchasing individual securities. In fact, most investors can create a fully diversified portfolio by purchasing 5 or 10 of the right index funds or ETFs.

The question remaining is, how do I select the appropriate funds to create a successful portfolio that is diversified among different asset classes? Start by looking at the investment objective of the fund. For example, a fund designed to track the performance of the Standard & Poor’s 500 Index would be a good fit for the U.S. large cap portion of your portfolio. Next examine the strategy of the fund. Typically passive funds that are designed to match the benchmark index have much lower cost associated with them than do actively managed funds where the manager is trying to beat a particular market. Finally be sure to check the expense ratio which includes management fees, marketing fees, other expenses, and annual operating expenses of the fund. Two funds may be managed identically to one another, yet, one could have significantly higher fees.

Regardless of your investment strategy, it’s essential that you reduce your risk exposure by diversifying among different asset classes. Develop a strategy that is aligned with you and your future, and stick to it. Having said that, don’t be afraid to make changes as you mature and your responsibilities change. Review you asset allocation annually and rebalance as necessary, but avoid trying to build the perfect portfolio. Barring any major life changes, most of us should only need to overhaul their asset allocation every 5 or 10 years.