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One thing you can do to … your retirement savings

Re-posted from MSN Money

Being able to contribute consistently enough to your retirement savings accounts is the most important aspect of any retirement plan, but it’s also by far the most challenging. So finding a way to make regular, adequate contributions easier is really the key to a successful retirement. And the best way to accomplish this is by having a written financial plan.

Why does a written plan help?

Self-help gurus uniformly urge their clients to write down their goals, plans, and dreams for a reason. Writing something down has a significant psychological impact on the writer: It makes that written declaration more “real” to us and gives us accountability. Once it’s in writing, we feel more compelled to follow through on it. For a task like saving for retirement, that feeling of accountability can make all the difference in sticking to a contribution plan versus having a plan but only contributing “when it’s convenient.” A written plan also motivates us by reminding us what we stand to gain tomorrow by sacrificing today.

The power of written financial plans

A recent study by Charles Schwab highlighted the impact that written financial plans have on retirement savings. The study compared various financial attributes of Americans with a written financial plan to those who did not have one. For many important financial tasks, the difference between the two groups was startlingly high.

For example, 27% of savers with written financial plans maxed out their contributions to their retirement savings accounts, compared to 11% of savers without plans. Thirty-four percent of savers with written financial plans had investments in addition to their retirement investments, versus only 16% of those without written plans. And 49% of savers with written financial plans felt very confident in their ability to reach their financial goals, as opposed to just 13% of those without written plans.

Starting your financial plan

Financial plans come in many forms — debt payment plans, down payment savings plans, investing plans, and so on. And while the idea of creating a financial plan may sound daunting, in reality such a plan can be extremely simple, as you’ll see shortly. We’ll focus on a retirement savings plan, but the principles are similar for creating any type of financial plan.

First, your plan needs a goal. For a retirement savings plan, the goal will typically be to save enough during your working years so that when you reach your planned retirement date, you will have enough money to live comfortably for the rest of your life. Because different savers have very different ideas of what “living comfortably” entails during retirement, the exact number you end up with as a savings goal will depend largely on your own preferences and situation.

In order to know how much money you’ll need to save for retirement, you first need to figure out how much you’ll be spending during that time. Ideally, you’ll write up a list of the expenses that you expect to carry during retirement and add them up. If that sounds like too much work, you can get a pretty fair estimate based on your current income.

If you anticipate a fairly sedate retirement without a lot of fancy, expensive activities, you can assume for planning purposes that 80% to 90% of your current income will suffice as annual income during retirement. Aim for the low end of this range if you’re sure you’ll be debt free by the time you retire (that includes owning a home that’s completely paid off). Otherwise, aim for at least 90% of your current income. On the other hand, if you dream of an adventurous retirement touring the capitals of the world, aim for at least 100% of your current income (or possibly even more, if you have really expensive plans).

Making it official

Once you have a goal for your retirement income, you can plug that number into a retirement calculator to find out how much you need to save in order to hit your target by your planned retirement date. Let’s say that your goal is to save $1 million by age 65 and the retirement calculator tells you that in order to reach your goal, you need to save $1,000 per month. Write this down in a form that will inspire you to follow through. For example, you might write “Millionaire by age 65: $1,000 every month into the 401(k).” Then post a copy of this document somewhere you’ll see it on a regular basis, such as next to your bathroom mirror, on the front of the refrigerator, or attached to the side of your computermonitor.

Just having the plan in writing, staring you in the face on a regular basis, can work wonders to improve your follow-through.

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6 Money Saving Tips You Can’t Afford To Miss

Re-posted from AICPA.ORG

6 Money-Saving Tips You Can’t Afford to Miss

Those fun, light-hearted GEICO commercials that ask if you are tired of paying too much for car insurance hone in on the idea of wasting your money –– paying too much for something or not getting enough.

As a CPA who is passionate about making my hard-earned money work for me, it’s important to take time to critically analyze what my cash is doing. Busy lives often lend themselves to costly complacency in one’s personal finances. Basically, we want bill paying done and our retirement planning intact with as minimal effort as possible.

At least once per year, I do a serious deep-cleaning scrub on my family’s finances. I look at what we’re paying and why, and I see where we need to do better. This “scrub” saves us thousands of dollars and I suggest each of you take a few hours each year to review your finances critically. Don’t let your money run itself; it needs you to keep it on track.

Here are six tips to make your money work for you (consider sharing these with your clients):

  1. Carefully review your credit/debit card auto-drafts.

Did you join Consumer Reports to get insight on what car to buy and forget to cancel it after your purchase? Or sign up for other subscription services that you haven’t used in months? Review your statements for these $10-20 no-value bills. Though small, they add up quickly.

On the flip side, auto-draft anything you can to your credit card. You’ll consolidate bill paying, and get paid to pay your bills. Often, electricity, water, cable, etc., can be auto-drafted. One can easily earn hundreds of dollars each year (in points and rewards) by effectively using a credit card. But, don’t forget to pay off the balance each month! Interest on credit cards is extremely costly. I suggest setting up another auto-draft to pay your credit card bill directly from your bank account.

  1. Bundle your insurance (home, automobiles, etc.), and scrutinize rate increases.

These bills can significantly fluctuate each year as your insurance carrier offers new incentives or changes its rates (sometimes arbitrarily). This year, I noticed our home and auto insurance went up by about $1,500. After calling my agent, I learned that there was an explanation for some of it (insurance regulation hiked up the price), but there was no excuse for the bulk of it. After asking my agent to price shop, I decreased my bill and increased my coverage. My agent wasn’t going to do this price shopping without my nagging, but a five-minute phone call saved me over a thousand dollars.

  1. Review your investments.

Make sure you are deferring appropriately to your 401(k), taking advantage of company matches and profit sharing plans. Also, ensure you’re planning for retirement with other investment vehicles (IRAs, etc.). Review your portfolio, making sure it’s well-balanced. Consider contacting your 401(k) or brokerage adviser to confirm your investments (as a whole) keep your plans on track. Consider making serious adjustments the older you get; the closer you are to retirement, the less risk you may want to take.

  1. Know the market rates for cell phone plans, cable, internet, etc., and don’t be afraid to negotiate.

Cell phone rates have actually gone down recently as more competition enters the market. If you bundle plans with family members, you may be able to save even more. Plus, many employers offer their employees discounts for certain carriers.

Cable/internet, for example, is a bill that I need to renegotiate each year. Otherwise, they go up significantly. Call your cable/internet company and ask about promotions, and let them know you’re not happy that your bill went up. Talk to someone in their customer retention group. They usually have more flexibility to keep your rates lower (or offer you freebies like premium channels) to keep you from switching to a competitor. If it doesn’t go well the first call (and you have time and patience), call back. A different representative may give you a better deal.

  1. Review your debt financing and interest rates.

Prioritize what to pay off quickest based on which item has the highest interest rate. Explore where you may be able to decrease interest rates by re-financing or consolidating debt. Make an extra payment that goes directly to principal. You can save significant money by paying off your debt sooner.

  1. Know what you’re worth (net equity).

Annually, prepare a financial statement. Add up your assets (cash, investments, property, etc.) and subtract your liabilities (loans, etc.) to yield your net worth. Are you too heavily in debt, or saving enough for retirement? These are important questions to know your true financial health.

I use Mint.com (a free application) to track our family’s progress, but a simple spreadsheet or other system works. The point is: don’t let your finances be a surprise to you.

The AICPA is committed to helping us achieve financial security. Visit feedthepig.org for additional tips and resources to help you budget, invest and reduce debt.

Susan C. Allen, CPA, CITP, CGMA, Senior Manager, Tax Practice and Ethics-Public Accounting, Association of Certified Professional Accountants