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No matter what stage of life you are in, or where you are at in planning your retirement,  you are about to welcome in a New Year and new resolutions.  The following article provides 10 main concepts to keep in mind when it comes to making financial resolutions for the New Year.

10 Financial Resolutions for the New Year

By Joshua Kennon, About.com Guide

Financial Resolution 1: Know What You Want

Have a clear, concise financial goal for the year. It isn’t good enough to say, “I want to have my credit card paid down and more money in the bank”. Instead, you should say, “I have the balance on my credit card paid down to $0, over $5,000 in my savings account, and a fully funded IRA.”

Financial Resolution 2: Prioritize Your Debts

Not all debt is created equal. Make a list of your liabilities and organize them by the annual interest rate. Those with the highest rates (most likely your credit card debt) should be paid off immediately. It does no good to invest money while you are paying 19%+ each year. In a lot of cases, the wisest course of action is to sell any certificate of deposits, savings bonds or other cash holdings and use them to pay the balance.

Financial Resolution 3: Open an IRA

If you haven’t done so already, open an individual retirement account (or IRA for short). Your financial planner or accountant should be able to tell you whether a Traditional or Roth IRA is better for you. Both offer important tax advantages that can add up to a significant amount money by retirement.

Financial Resolution 4: Enroll in an Automatic Savings Plan

Automatic savings plans are now offered for everything from brokerage accounts to government bonds. Simply call your broker and tell them you want a certain amount of money withdrawn from your checking or savings account each month, on a certain date, and deposited into your investment account. This way, you are forced to save because the cash is drawn directly from your bank before you can get your hands on it.

Financial Resolution 5: Close Unnecessary Accounts

Banks and financial institutions charge fees for everything under the sun. Is it really necessary to have several credit or checking accounts? Although there are exceptions, in the vast majority of cases the answer is a firm no! To put things into perspective: imagine your bank charges you $8 each month for your checking account. In thirty years, that $8 will have added up to more than $8,500 after taxes!

Financial Resolution 6: Make Money Doing What You Love

Most people can name at least one thing they are truly passionate about. One of the ways to enjoy your work is to only do the things you enjoy. Find a way to turn your passions and hobbies into profit. The world is full of amazing jobs such as full-time ice cream tasters and video game testers!

Financial Resolution 7: Collect Your Change

Any time you make purchases with cash, only spend whole dollar amounts. If you go to the grocery store and your ticket comes to $67.39, pay $70 in cash and pocket the change. The first thing you should do when you go home is throw the money in a large container (empty water jugs are perfect.) If you adhere to this policy and don’t spend any of the change, you are likely to save several thousand dollars over the course of a year.

Financial Resolution 8: Give Money

One of the most effective ways to realize the value of money is to give it. It is a powerful and effective way to change other people’s lives for the better while giving you a better sense of freedom financially. Suddenly, you realize just how much promise $20 contains.

Financial Resolution 9: Begin Using Personal Finance Software

Knowledge is power. If I asked ten people on the street how much they spent last year on books or movie tickets, nine of them probably couldn’t answer. With a few keystrokes, however, someone using personal finance software such as Microsoft Money or Quicken can find out.

Financial Resolution 10: Read a Financial Book Each Month

If you want to learn to cook, you read cookbooks. If you want to learn to fix an engine, you ask someone to show you. The printed word is amazing in that it allows you to communicate directly with the most brilliant financial minds of the past century. Consistently applying yourself to learn as much as you can about the financial markets, the nature of money and investments in general is absolutely essential to creating long-term wealth^.

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It is true.

“When people win, they like risk. When they lose they hate it.”

- Olivia Mellan, Investment Advisor Magazine

It is easy for an investor to set his or her risk tolerance high when things are going well, but when things aren’t going very well, it is another story.

As an investor, it is important to ask yourself, “Will I be okay if my account drops 10, 20, or even 50 percent?” This will help you determine your investment risk tolerance level.

When you set your risk tolerance level properly, you will be happy when your account is doing well, and will be able to sleep at night when it is not doing so well.

At Paragon Wealth Management, we have created a risk tolerance survey to help investors determine how much risk they can tolerate. This survey determines how conservative or how aggressive you need to be invested. Click on the link below to determine your risk tolerance.

At Paragon Wealth Management we talk a lot about having a good investment strategy, and planning ahead for times that are both good and bad. This will help you to stay focused on the long-term instead of being swayed each day by what is in the news. Below is a good article that goes along with this idea.

How to Stay Frugal and Focused in a Recovery

Written by Wojciech Kulicki (a.k.a. Wojo) at
Fiscal Fizzle

A lot of people are talking about recovery–you can feel the buzz in the air, and the excitement of many of us who have felt the pressure of the economy take a direct hit on our ability to earn an income and maintain a basic lifestyle.

However, and it’s a big however, research and consensus around the web and major money magazines seems to indicate that we have a very short memory. So short, in fact, that our national savings rates and other major spending/savings indicators correlate exactly to the economic conditions of our time.

In other words, when the economy is tight, we spend less and save a lot. When it gets better, we tend to spend more and save less.

I was speaking to a fellow blogger a few days ago, who remarked that he “doesn’t buy into the economy.” In other words, he believes that doing the right things on a personal level should be our primary concern.

I agree to a certain extent–reacting to the news of the day, especially for long-term decisions like investments, is financial suicide.

But I do believe we need to be reactive to a certain extent. As our circumstances change for the worse, we may need to contract our budget more than expected. When they get better, we may need more help being diligent with savings when everyone around us is going on shopping sprees.

To that extent, and being very mindful of our natural, “wired-in” tendencies to go with the economic flow, I have several suggestions for how to keep your “recession” state of financial mind as we come out of this mess (whenever that may be).

Why Would I Want to Be Stuck Here?

By now you might be thinking–all right, Wojciech, I see what you’re saying, but why in the world would I want to be “stuck” in a recession mindset? Haven’t we endured this long enough?

I agree–going through a recession is anything but pleasant. But let’s take a look at some of the financial habits we’ve developed as a result:

• As a country, we’ve saving more than we have in a long, long time.
• Frugality has become the buzz word of the year, as more and more people discover that value is more important that price.
• We’ve simplified, contracted, and streamlined our financial processes, businesses, and spending habits.
• Lending practices, although they have over-contracted for now, will be more reasonable for the foreseeable future.

So while a recession may not be the best things in terms of pure economic sense, it’s a great cleansing and reset mechanism for our money.

Maintenance Strategies

Understanding our run-away tendencies to over-correct in an upturn, here are some of the things we will be doing in the coming months to prepare:

• Automate as much as possible. When we remove emotional decision-making from our financial life, we can reduce or eliminate decisions that hurt our long-term success with money. Consider your current situation and determine what you can automate–retirement contributions and savings are two that come to mind immediately, but you can also play tricks with extra payments to your mortgage or something similar. The more beneficial activity that happens behind the scenes, the better.

• Cultivate a peaks-and-valleys philosophy. If you haven’t read Peaks and Valleys yet, I recommend it–it took me less than an hour to get through the book. The basic concept is that you appreciate and manage the good times, while finding and using the good in bad times. If you come to understand the book, you’ll see why saving for a “rainy day” is such an important philosophy–it helps you get through the valley and onto the next peak.

• Catch yourself constantly. One of the most valuable characteristics of human beings is self-reflection. We are uniquely capable of analyzing our own thoughts and behaviors, and changing them at will. One of the ways we can control our ascent out of recession is constant self-reflection. Ask yourself–would I have done this a year ago? Is this a responsible use of my money, or am I spending just because I now can?

• Lock in your current behavior. One way to do this is to make note of all the relevant “ratios” that you can think of–debt to income, savings to income, etc. Another practical method is to monitor your net worth over a period of months and years. Finally, taking a “snapshot” of your budget–reminding you of how much you were spending during the recession, is another fantastic mental cue to take it easy.

• Curb your enthusiasm. Yes, I realize that’s the title of a hit HBO series. But it’s also a great strategy for not getting ahead of yourself during recovery. When financial circumstances get bad, we tend to resist lowering our spending habits. When times get better, we are quick to follow with our wallets. Slow down. Maintain a lower level of lifestyle, longer. Save the difference and experience the security of knowing that there is space between your income and expenses.

If Nothing Else…

If there’s one concept I would like you to take away from today’s post, it’s to have patience and react slowly to upcoming changes. While your financial situation may be far below “normal” right now, we don’t have to over-compensate when times are good and send it above that normal level.

Instead, we need to use the excess to prepare for the next downturn, so that we can maintain our “normal” level longer, perhaps through the entirety of the next recession.

How Will You Manage Recovery?

These are only my strategies for managing our mindset and finances through an economic recovery. What are some of the things you’re planning as times get better and we face the risk of forgetting how bad it got?

photo by AMagill

istock photo

If you are thinking about converting your traditional IRA to a Roth IRA in 2010, you may want to consider the pros and cons. Below is an informative article about this topic written by Darrell J. Canby.

FINANCIAL SENSE: Roth ‘n’ Roll in 2010

By Darrell J. Canby/Local columnist

November 23, 2009

Unless Congress passes legislation to alter the current law before the end of the calendar year, the potential for Roth IRA conversions in 2010 is vast.

Roth IRA conversions are not new. However, until now only taxpayers whose income was less than $100,000 were eligible to convert traditional IRAs to Roth IRAs. Effective in 2010, there will be no income limitation. As a result, many people should review their situation to determine if a conversion would be beneficial for them and would help them achieve their long-term financial goals.

To determine whether a conversion would benefit you, consider the differences between traditional IRAs and Roth IRAs. Contributions to traditional IRAs are tax-deductible, within certain limits, during the year the contribution is made. Income taxes are deferred on earnings. Income is taxable when funds are withdrawn from the traditional IRA.

For many people, Roth IRAs offer a better opportunity. Funds are contributed on an after-tax basis, but they can grow on a tax-free basis and taxes will never be due on Roth earnings, as long as the assets are held in the Roth IRA for at least five years and any withdrawal occurs after the individual reaches age 59 1/2.

Tax landscape
This advantage is especially important because taxes are scheduled to increase.

Earlier in this decade, tax legislation was enacted that, among other things, lowered individual income tax rates and raised the asset level at which an estate would be taxable. The law also provided that the estate tax would be zero in 2010. It then provided that, effective in 2011, individual income tax rates would revert back to pre-legislation levels, the exemption for estate taxes would decrease to $1,000,000 and estate tax rates would increase back to a maximum rate of 55 percent. The same legislation eliminated the income limitation for Roth IRA conversions.

Unless Congress changes the law, taxes will increase automatically. If you pay taxes at a 25 percent rate today, you will be paying at a rate of 28 percent in 2011; the next two brackets will increase by 3 percent as well, and if you pay at the current maximum 35 percent rate, your rate will increase to 39.6 percent.

In addition, further tax increases may be necessary. This year’s deficit alone is projected to be $1.4 trillion. Billions spent on the financial crisis, plus potential spending on healthcare reform, could result in a future tax increase. So your tax rate could be higher in years to come than it is today.

The amount of a Roth conversion creates taxable income. For conversions in 2010, the tax can be paid as part of your 2010 tax return at the rates in effect for 2010. You can also choose to report the 2010 conversion income 50 percent in 2011 and 50 percent in 2012 and pay tax at the prevailing rates at that time. Keep in mind that the rates in 2011 will automatically be higher unless Congress changes the provisions of the current law.

In order to enjoy the tax free benefits of a Roth IRA, there is a waiting period of five years and upon distribution, you must be at least age 59 1/2. So if you execute a conversion on Jan. 1, 2010, you need to wait until Jan. 2, 2015, before taking a distribution to insure the distribution will be tax free.

Advantages of Roth conversions
So what are the advantages of converting to Roth IRAs? Should you convert some or all of your IRA assets to Roth IRAs? Should you convert all in one year or over several years?

It would be wise to consult with your tax adviser to answer these questions, but the following factors are key:

Tax free build-up of converted assets. The major advantage is that all of the growth in value of the Roth IRA from the conversion date will be tax free forever, as long as you meet the five year rule and are at least age 59 1/2 when you take distributions.

Hedge against increasing tax rates. If tax rates increase, keeping your assets in a traditional IRA may mean you will pay higher taxes on the future distributions than the rate you may pay now on the conversion.

The performance of your portfolio. If your portfolio lost a lot of its value in the recent bear market and has not fully recovered, you can save on taxes by converting now, before your portfolio recovers, because taxes will be based on the value of your IRA at the time of conversion.

Allows for tax diversification in the future. You could take a portion of your income needs from a traditional IRA and some from the Roth IRA to avoid going into a higher tax bracket. You can also use this flexibility to keep the taxation of social security to a minimum and to potentially lower your costs for Medicare.

Increase in taxable income could absorb losses. Some people have experienced business losses in their S Corporation, partnership or LLC that could be used to offset the income associated with a Roth conversion. There also may be some people that have large charitable contributions that were limited due to their income. The income associated with a Roth conversion could be offset in part by these deductions.

Required minimum distribution eliminated. When you reach the age of 70 1/2, you are required to take a minimum distribution from your retirement assets in most cases. Required minimum distributions were relaxed in 2009 due to the financial crisis. Minimum distributions are not required for Roth IRAs. Some people do not wish to take distributions, because they want them to grow for the benefit of their heirs. Roth IRAs allow taxpayers to save for this objective.

Your age. If you’re young and have many years until retirement, Roth IRAs are especially attractive, because your investments should be able to grow tax-free for many years before you use them.

Legacy asset. If you leave your children a traditional IRA asset, they will be responsible for income taxes as they make withdrawals. If they inherit a Roth IRA, there will be no income taxes, so it will be less of a burden on their children.

Disadvantages of Roth conversions
While it is important to consider all of the potential advantages of Roth IRAs, you should also be aware of the disadvantages.

Immediate tax cost. There is an immediate tax cost that reduces your investment assets available for your retirement.

Tax at a higher rate. The conversion amount produces income that may cause the effective tax rate to be higher, due to phase outs of certain deductions.

Insufficient assets outside of retirement plans to pay the tax. The general rule is that you do not want to use retirement plan assets to pay the tax associated with a Roth conversion. So if you do not have assets outside of retirement assets, you probably should not consider a Roth conversion. As with any of this advice, you should consult a tax professional to be sure.

Tax rates will be lower in retirement. Your situation may suggest that your income tax rate may be lower in retirement. You would not want to pay tax now at a higher rate than you would otherwise be paying in retirement.

Need to have distributions prior to five-year waiting period. If you will need to make withdrawals from your IRA assets within five years, you will not want to have to use any converted assets. Keep enough assets outside of the Roth to avoid such a withdrawal need from that account.

Your age. If you have attained a level of maturity that would limit the amount of time for the tax-free benefits, you may not have a significant advantage from a conversion.

Your tolerance for risk. If your IRA money is invested in low-interest certificates of deposit or other investments that are expected to earn little, you’re likely better off keeping your money where it is and deferring taxes.

Recharacterization
An IRA that was converted to a Roth IRA can be recharacterized back to a traditional IRA before a timely filed tax return. For example, if you converted $10,000 of your traditional IRA to a Roth IRA on Jan. 15, 2010, you could convert that back to the traditional IRA by April 15, 2011, (or as late as Oct. 15, 2011, if you filed a proper extension of time to file your 2010 return). So if you did execute a conversion and decided it was a mistake, the opportunity to convert back is available. A timely recharacterization avoids paying the tax on the conversion.

Summary
This is a complex area with many implications. Therefore it is best to consult with your tax adviser before making any moves. Weigh the advantages and disadvantages to determine if a conversion is in your best interest.

It may be best to convert some, but not all, of your retirement assets to Roth IRAs. One reason is to start the five-year waiting period, because once it is completed you can alleviate that requirement on conversions in the future.

Another reason to have both a taxable IRA and a non-taxable IRA is that it allows you to combine the two as part of a tax strategy to lower your overall taxes. Taxes on 401(k) plans and traditional IRAs, for example, are deferred until income is distributed. You can take income from these tax-deferred retirement accounts up to the point where you would be entering a higher tax bracket, and then you can take additional distributions from your Roth IRAs without incurring additional taxes.

For many taxpayers, it will make sense to convert as much as possible to Roth IRAs in 2010. The younger you are when you convert your IRAs, the longer the timeline during which they will be able to grow tax-free.

Congress will be looking for new sources of revenue, thus rules for Roth IRAs could change, making them less attractive. Roth IRAs may be too good to last.

Darrell J. Canby, CPA, CFP^@, is president of Canby Financial Advisors, LLC, a registered investment adviser at 161 Worcester Road, Suite 408, Framingham. He offers securities as a Registered Representative of Commonwealth Financial Network, Member FINRA/SIPC. He can be reached at 508-598-1082 or dcanby@canbyfinancial.com.

This communication is strictly intended for individuals residing in the states of AZ, CA, CO, CT, DC, DE, FL, MA, ME, MI, NC, NH, NJ, NY, OH, OR, RI, TN, VA, VT, WA.  No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services.

Due to regulatory requirements, I am unable to respond to any comments posted to this site.  If you would like to contact me, please e-mail me at my address above.

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