Five Smart Money Moves For the New Year

The dawn of the new year is an ideal time to give your finances a fresh look. Here are five things to put on your financial to-do list:

1. Take Stock of Your Retirement Investments

It's never too soon to think about saving for retirement, and it's never too late to start planning. And if you're in your 50s, now is a good time to take stock of how much you've saved so far and how much further you need to go. Add up how much you have in 401(k)s, IRAs, and annuities, and project conservatively how much these will grow by the time you retire. Get a Personal Earnings and Benefit Estimate Statement from Social Security, and add in any other income, such as pensions.

Most experts say you'll need 70 percent to 90 percent of your pre-retirement income to keep up your standard of living during retirement. Compare your retirement income projection, based on your current investments, to how much income you'll need and calculate how much more you should save.

Talk to your financial advisor about the right investment mix, and don't short yourself on cash investments. Shop for the best CD rates and best savings account rates to get the highest rates of return.

2. Pay Down Credit Card Debt

If you're like many consumers, your credit card interest rates went up in 2009 as credit card issuers scrambled to raise rates before the new federal credit card reform rules becomes effective in February 2010. Focus on paying down the highest interest rate cards first, and avoid adding more charges. If you're thinking about transferring high-interest balances onto a card with a lower rate, beware of balance transfer fees. Generally, it's better for your credit score to pay down the cards than move debt around.

3. Tame Compulsive Spending

If you're having a hard time making ends meet, track your spending for a month. Write down all of your expenditures and see where your money goes. You may be surprised to learn how much you're throwing away on pointless items. Look for trouble spots and set goals for cutting back. Pay yourself first to curb spending. Set a monthly savings goal and have that money automatically deducted from your checking into a savings account each month--before you have a chance to spend it.

4. Establish or Boost Emergency Savings

Although Americans increased their savings rates in 2009, most still reported not having enough savings to support themselves for more than three months if they lost their jobs, according to a recent survey by HSBC Bank USA. Even more disturbing: More than a third didn't have enough savings to support themselves for one month if they became unemployed.

If you already have an emergency savings fund, evaluate whether you should add to it. Financial experts recommend setting aside enough to cover your basic living expenses for at least three to six months. Given the length of the recession, some now suggest emergency saving funds to cover a full year.

Deposit emergency savings money in savings accounts and money market accounts as well as short-term CDs. Avoid long-term CDs for emergency funds, because you pay a hefty withdrawal penalty if you take your cash out early. Shop around for the best interest rates.

5. Set a Realistic Budget

Take a hard look at your expenses, calculate your income, and set a budget that takes into account your goals for retirement and other savings. Even if you already have a written budget, it's a good idea to give it a fresh look periodically to make adjustments.



HSBC Bank • HSBC Survey: Americans Saving More But Still Not Enough • Sep 03, 2009 • Yahoo! Finance: http://finance.yahoo.com/news/HSBC-Survey-Americans-Saving-bw-1177048108.html?x=0&.v=1

Employee Benefit Research Institute • How to Stay Disciplined with Your Savings • ChoosetoSave.org: http://www.choosetosave.org/tips/index.cfm?fa=display&content_ID=3533

National Foundation for Credit Counseling • NFCC TIPS FOR CONSUMERS ON SPENDING WISELY • http://www.nfcc.org/FinancialEducation/consumertips/SpendingWisely.cfm

Mary Beth Franklin • The Basics: How Much Do You Need? • MSN MoneyCentral: http://moneycentral.msn.com/content/Retirementandwills/Createaplan/P142702.asp

Money Market Accounts Versus Money Market Funds: What's the Big Difference?

Money market funds and money market deposit accounts are very similar, but they differ in one significant way, and it's important that you understand the difference.

Both money market funds, also called money funds, and money market deposit accounts are considered low-risk, liquid investments, and they usually offer better interest rates than traditional savings accounts. They let you write checks from the accounts and withdraw money at ATMs. And often the same bank offers both money market accounts and money market funds. Confused about the distinction? You're not alone.

Money Market Account or Fund?

Here's the key point: Money market funds are actually mutual funds that invest in short-term fixed-income investments, such as government securities and certificates of deposit. Money market deposit accounts are interest-bearing bank accounts. What impact does this have on you as an investor? Here are seven things to keep in mind.

• Because they're not bank accounts, money market funds are not insured by the Federal Deposit Insurance Corp. So if the fund goes belly up, you could lose your money. Money market funds are still considered less risky than stocks, but they are not as safe as money market accounts.

• Money market deposit accounts are insured by the FDIC. Coverage limits are $250,000 per person, per financial institution through the end of 2013. That coverage limit is permanent for some retirement accounts, but temporary for all other accounts. It will return to $100,000 in 2014 unless Congress extends the higher limit. Money market accounts through credit unions are insured by the National Credit Union Administration. NCUA insurance coverage is also limited to $250,000 per person per credit union.

Money Market Fund Risk

• Money market funds try to keep pricing at $1 a share, but values can decline, as they did last fall for the huge and well-established Reserve Primary Fund, a scenario Wall Street referred to as "broke the buck." Until then, money market funds were deemed among the safest investments. In an effort to maintain the stability of the global financial system, the U.S. Treasury put in place a temporary guarantee program starting in September 2008 to ensure that investors would not lose any of their original investments in money market funds. But that program expired in September this year, and it covered only those funds that paid a fee to participate.

• Money market funds may pay a higher yield than money market accounts, depending on the risk level of their investments. Financial experts advise that you evaluate funds carefully. Don't choose a fund just because it pays a higher yield--that higher yield may indicate riskier investments. Weigh risks when choosing funds.

• Diversify if you decide to invest in money market funds, just as you would with stocks and bonds. By investing in money market funds from different providers, you can spread out your risk.

Money Market Accounts: The Safest Choice

• Stick with money market deposit accounts if you have zero tolerance for risk. Just make sure your deposits at each of your banks are within the FDIC coverage limits. Remember, all your deposits at a particular financial institution--not just the money market account--are counted toward the insurance limit.

• Finally, shop for the best money market rates. You don't have to limit yourself to local banks in your town. Expand your search by comparing money market interest rates online



Andrew Chan • Money market funds vs. money market accounts • Jan 13, 2009 • Boston.com: http://www.boston.com/business/personalfinance/managingyourmoney/archives/2009/01/money_market_fu.html

U.S. Treasury • Treasury Announces Expiration of Guarantee Program for Money Market Funds • Sep 18, 2009 • http://www.financialstability.gov/latest/tg_09182009.html

NCUA • NCUA Share Insurance FAQ?s • http://www.ncua.gov/Resources/ShareInsurance/NCUAInsuranceFundFAQs.htm

TARA SIEGEL BERNARD • Money Market Funds Enter a World of Risk • Nov 17, 2008 • The New York Times: http://www.nytimes.com/2008/09/18/business/yourmoney/18money.html

CDs Versus Fixed Annuities

Fixed annuities are often described as CD-like investments for retirement because they provide guaranteed rates of return. But fixed annuities and CDs differ in a number of ways, and it's important you understand how these vehicles work before you invest.

Certificate of Deposit and Fixed Annuity

Unlike a certificate of deposit, which is issued by a bank, a fixed annuity is issued by an insurance company. You agree to invest a sum in the annuity, and the insurer guarantees you a rate of return. You've probably heard about variable annuities, too. With a variable annuity, your money is invested in accounts similar to mutual funds. The potential for return is greater for a variable annuity than for a fixed annuity, but the risks and fees for variable annuities are higher, too.

Fixed Annuity Investments: Immediate or Deferred

There are two main types of fixed annuities--immediate and deferred. With an immediate annuity, you pay a sum to the insurer once you've retired or are close to retirement, and the insurer begins making regular income payments to you for a certain period of time, such as 10 or 20 years, or until you die. With deferred annuities, your money is invested and accumulates until you are ready to make withdrawals. At that point, you can convert the deferred annuity to an immediate annuity.

Fixed Annuity Advantages

Unlike stocks, fixed annuities provide a steady, predictable income stream to supplement retirement income. Other advantages include:

• Annuities have no IRS investment limits, so they're a good option for people who have maxed out annual contributions to their 401k and IRA accounts.

• You don't need a ton of cash--investment minimums are as low as $1,000.

• Interest earnings are tax-free until you pull the money out.

• Return rates on fixed annuities are often higher than the best CD rates.

Disadvantages of Fixed Annuities:

Annuities are more complicated than CDs, and many people often misunderstand how they work. Disadvantages include:

• There are fees, including a commission for the broker who sells the annuity and a "surrender fee" if you take the money out before a certain date outlined in the contract, usually seven or so years after you purchase an annuity. That doesn't include the 10% penalty you pay on earnings if you withdraw any of the annuity money before you're 59 1/2 years old. Some investment companies do offer "direct-sold" annuities, which have no commission or surrender fees.

• The term "fixed annuity" is a bit of a misnomer. The rate is fixed for a limited period and then can drop, although it can't drop below the guaranteed level.

• Inflation can cut into the purchasing power of your hard-earned money over time if you go for fixed payments for the rest of your life.

• Fixed annuities don't have the earning potential of some other investments, such as stocks.

• You could lose your money if the insurance company that issues the annuity goes bust. With CDs issued by FDIC-insured banks, you get your money back if the bank goes under, as long as your deposits at that institution are within FDIC insurance limits.

Cash Investments: Know Your Options

Financial experts advise against annuities unless you're already investing as much as you can in other retirement plans. Learn the basics of annuities and thoroughly research your options, and remember that brokers who sell annuities make commissions, so they may push the benefits and soft-pedal the drawbacks.

Cameron Huddleston • What to Ask Before Buying an Annuity • Aug 01, 2007 • http://www.kiplinger.comhttp://www.kiplinger.com/basics/archives/2002/04/story25.html
Securities and Exchange Commission • Variable Annuities: What you Should Know • Apr 28, 2009 • http://www.sec.govhttp://www.sec.gov/investor/pubs/varannty.htm

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Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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