8 Prescriptions to Improve Your Finances

June/July 2014, Vol 2, No 3 - Inside Money
Lawrence B. Keller, CFP, CLU, ChFC, RHU, LUTCF
Andrew D. Schwartz, CPA

Financial planning is a process that can help you reach your goals by evaluating the whole financial picture, then outlining strategies that are tailored to your individual needs and available resources.

Why Is Financial Planning important? The term financial planning can be used to illustrate many things. It can be a comprehensive plan, focusing on several needs or goals simultaneously, or limited to specific areas such as establishing a budget, or saving for a home, a child’s education, or retirement. A comprehensive financial plan serves as a framework for organizing your financial life. One of the main benefits of a financial plan is that it can help you balance competing financial priorities by clearly showing you how your financial goals are related, and how decisions made in one area subsequently affect the others.

What Steps Can You Take?
Here are some prudent steps you can take to keep personal finances heading in the right direction:

1/ Reset your retirement savings. Most people find it easier to maximize their retirement plans by depositing a fixed dollar amount each month or a percentage of their salary. Instruct your employer to withhold enough each month for your 401(k) or 403(b) plan to ensure reaching the maximum contribution of $17,500 in 2014. Are you self-employed? If so, you can contribute up to $52,000 annually into a Simplified Employee Pension (SEP), Keogh, or Solo 401(k) plan for 2014. In addition, if you are aged 50 years or older by December 31, 2014, the maximum contribution increases to $23,000 for 401(k) and 403(b) salary deferrals, and $57,500 for Solo 401(k) plans.

2/ Refinance your home. You’ve heard about the record-low interest rates. You may want to lower your monthly mortgage payment by refinancing to a lower interest rate or to a shorter loan term (eg, from a 30-year mortgage to a 15-year mortgage), allowing you to own your home in a shorter period of time. You may want to refinance your adjustable rate mortgage (ARM) to a fixed-rate mortgage or a new ARM with better terms. Finally, another option would be to refinance in order to take cash out of your home or simply use your home equity for home improvements, to pay for college, or to reduce or consolidate existing debt.

3/ Reduce your student loan debt. Unfortunately, many healthcare professionals who could be eligible to refinance student loan debt are not aware that the option exists. Most borrowers tend to “set and forget” student loans, choosing a repayment plan after graduation and never taking a second look. The problem with this approach is that their rate remains the same throughout the life of the loan, even as their financial situation improves and they potentially become eligible for a lower rate. As its name suggests, consolidating implies combining multiple student loans into 1 loan.

However, the word can have different implications depending on whether it refers to federal or private student loans. Federal student loan consolidation is offered by the government and is available for most types of federal loans (no private loans allowed). After the loans are combined, the resulting interest rate is a weighted average of the original loan rates, which means the borrower does not effectively save any money.

Similar to federal consolidation, a private consolidation loan allows a borrower to combine multiple loans into 1. However, the resulting interest rate is not a weighted average of the original loan rates. Instead, a private lender will typically use the borrower’s credit score and other relevant financial information to give him a new interest rate and loan, then use that loan to pay off the original loans. Essentially, consolidating loans with a private lender is the same thing as refinancing those loans. Not all student loan refinance lenders are alike. When comparing private lenders to determine where to refinance, borrowers should consider the interest rates, flexibility, and additional benefits available. Social Finance, Inc and Darien Rowayton Bank are examples of private lenders. Important disclosure and repayment information for SoFi refinance loans can be viewed on their website at www.SoFi.com.
 
4/ Revise your savings and debt reduction goals. Take a few minutes to set new savings goals. Ideally, pharmacists, physician assistants, and nurse practitioners should save 15% to 20% of their gross income toward retirement. While it is true that if you start early you can save less, saving 15% to 20% provides flexibility for years where you might not be able to save as much, to allow for poor investment returns, or for a personal or financial catastrophe such as divorce or disability. If all goes well and none of these scenarios materialize, then you will be left with a wonderful choice: retire earlier or retire wealthier.

5/ Rebalance your investment portfolio. Warren Buffett said it best by stating, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” During 2013, the stock market posted substantial gains. By rebalancing your portfolio to its original or updated asset allocation, you lock in gains from the sectors that performed the best and move money into sectors that underperformed and soon enough should be poised to catch up.

6/ Recalculate how much your retirement savings will be worth when you retire. Take a look at how much buying power you can expect to have at retirement. Be sure to download the online retirement calculator (www.mdtaxes.com) to find out what your savings will really be worth when you retire.

7/ Revisit your disability and life insurance needs. Throughout your career and life, disability and life insurance needs change. Give some thought to how much of these insurances you need versus how much you currently receive through your employer.

As a healthcare professional, the ability to earn an income is your most valuable asset. For this reason, you should purchase an individual noncancelable, guaranteed renewable “own-occupation” disability insurance policy with benefits payable to the age of 65  years or longer, a residual disability rider, a cost-of-living adjustment rider, and a future increase option rider. This type of policy will provide you with income if you are disabled and cannot perform your duties as a pharmacist, physician assistant, or nurse practitioner—even if you choose to work in another occupation. Be sure to look for a policy with a “multilife” or association discount. While this can provide men with a savings of 10% to 15% off of their policies, women can save as much as 60% off of their polices if a gender neutral or “unisex” rate is available.

Term life insurance is for the most part a commodity, so the pricing is very competitive and comparison shopping is easy. Websites such as www.term4sale.com can compare the premium rates of several insurance companies and various death benefit amounts and guarantee periods. You should employ the services of an experienced insurance agent who represents several companies to help you get the best rates, especially if your health is less than perfect. The agent will know which carriers are likely to provide a better underwriting classification based on your height and weight, immediate family history, and/or other medical issues to allow you to secure a lower premium rate. For example, if you have an immediate family (mother, father, brother, sister) history of cancer, certain companies will allow you to qualify for their best underwriting classification while others will not. As your financial situation changes, you can reevaluate the amount and type of insurance you own. A good general rule of thumb is to insure yourself for 7 to 10 times your gross income.

Purchase automobile, homeowner’s/renter’s, and umbrella (“excess liability”) policies. These policies will protect you and/or your assets, and future earnings. Make sure your deductible is at least $1000 and that the liability limits of your automobile and homeowner’s insurance match. In addition, if they are all with the same company, substantial discounts may be available.

8/ Resolve errors on your credit report. Each year, you are entitled to 3 free credit reports, so there is no excuse not to look at this important financial report annually, especially since errors are common. If you find information that is outdated, incorrect, or misleading upon review, you should contact the credit reporting agency as soon as possible. If the disputed data are found to be incorrect, the lender or information provider must notify all credit reporting agencies nationwide to correct the information in your file. If the negative information proves to be correct, you still have the right to insert a brief commentary (100 words) about the entry on your credit report. Order your free report at www.annualcreditreport.com.

Conclusion
Make sure that your plan is up to date. It is also possible that you will need to modify your plan due to changes in your personal circumstances or the economy. These 8 steps are a great place to start.

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