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Saving money to build wealth is a constant chore, but this week I’d like to offer six simple ideas to make it easier.
Step 1: Save rather than spend windfall income this year
To get the ball rolling, don’t spend your 2010 tax refund. If you’re getting a refund this year, try directing your tax refund into three separate accounts: a regular savings account, your retirement account, and an after-tax investment portfolio.
Saving is important, but possible surprise expenses mean it’s also a good idea to keep cash on hand from windfall sources, like a year-end bonus or an insurance settlements. If bills come up that you have to pay, you want to pay them out-of-pocket rather than borrow money to pay them.
Step 2: Cut down on portfolio maintenance with life-cycle or target-date mutual funds
The second idea is to simplify portfolio maintenance by using life-cycle or target-date mutual funds. If you are spending too much time worrying about allocation within your portfolio, consider buying life-cycle or target-date funds.
A life-cycle fund combines a “basket” of market sectors -- like international stocks, domestic stocks, bonds, and emerging markets -- into a single mutual fund. Target-date funds offer a preset allocation model, which is influenced by your retirement-target date or age.
It’s likely you’ll find target-date products inside your existing 401(k) plans. If you are investing outside of your 401(k) or qualified plan, you can find a life-cycle fund with most mutual-fund companies.
If you are not maximizing salary deferrals to your company sponsored plans, give it a boost. Consider increasing your deferral by 10 percent over last year.
Step 3: Start an after-tax retirement account
The next step, if you’re already maximized with deferrals at work, is saving in an after-tax account like a Roth IRA. If considering a Roth, watch the adjusted gross income triggers for individuals and couples.
As a reminder, the AGI phaseout begins at $107,000 of income for single filers and $169,000 for those filing jointly.
Traditional IRA contributions are made using pre-tax income, but all distributions are subject to income tax. With a Roth IRA, contributions are made with after-tax money, and all qualifed distributions are paid tax-free. In addition, Roth IRAs aren’t subject to required minimum distribution amounts at the age of 70 years and six months.
Step 4: Don’t give the IRS an interest-free loan
Taxpayers who overpay federal income taxes receive a refund, as the U.S. Treasury holds your money until you file for its return -- but the Treasury won’t pay you interest on what is essentially a loan from you to the government.
Here’s your action step: reduce your withholdings to better match what you owe. Compare how much tax is withheld from each paycheck against how much you actually paid in taxes last year.
With the market showing new momentum, some taxpayers might be better off investing the savings or using the savings to pay off credit-card debt.
Step 5: Use today’s low interest to accelerate loan payoff
If you have balance due on an interest-only loan, like a home-equity line of credit, consider extra funding to pay off principal due.
Step 6: Don’t overpay property tax in 2011
According to a recent Anchorage Chamber of Commerce presentation, real-estate values in Anchorage have been stable through 2010.
If you’re reviewing your tax assessment and see double-digit increases in valuation, you may want to discuss that increase with the municipal tax assessor. Monday, Feb. 14 is your last day for filing the appeal for this year’s assessment.
Contact Garret Wong at gwong@ktuu.com