1. Save at least 10% of your income
Saving 10% of your total income is paramount to your financial health. By saving at least 10% of your income, you are effectively living within your means. Many of the financial struggles that individuals and families face can be attributed to living beyond their means (spending more than they earn).
This is one of the most important aspects of a successful financial life. Saving 10% of your total income is a great method to take you to the next stage in your financial life cycle.
2. Have sufficient liquidity
Just as a building set upon a weak foundation will collapse under stress, a financial plan without sufficient liquidity is vulnerable to failure under economic hardship. We all face difficult financial times in our lives, and proper liquidity will help us weather a financial storm without irreparable damage. Having the right amount of emergency funds is the keystone of your financial foundation!
Once the proper amount of liquidity is determined, the money should be held in the most tax efficient manner possible. These emergency funds will strengthen your financial foundation and serve as a defense against a true emergency. We define an emergency as a situation that would result in a drop of your tax bracket.
3. Fully Fund Retirement Plans (can be applied to 10% savings goal)
This fundamental of financial success will serve two purposes. First, by contributing and funding a retirement plan, you will be saving towards or above your 10% goal. Second, money applied towards a defined contribution plan is not currently taxed. This tax–deferred money whittles away at the largest expense for Middle Americans: taxes. The government actually will subsidize your retirement by allowing favorable tax treatment of employee contributions into the plan. Another benefit to defined contribution plans (401K and 403b type plans) is the matching available from the employer. This allows an employer to match up to a percentage of the employee contributions. By not contributing at least up to the match, employees are leaving free money on the table.
Set Up a Retirement Plan or Fully Fund One Before Year-End – If you are self-employed, now is the time to set up a retirement plan or add pre-tax money to your existing plan to reduce this year’s income. If you still can, max out your pre-tax contributions to your traditional IRA, 401k, or 403b, and get a tax deduction to lower your taxable income. This year, sole proprietors can put $16,500 (pre-tax) into a solo 401(k), ($22,000 if you are 50 or over). Check with your plan administrator for limits and deadlines for different types of plans.
4. Have the right house and mortgage
Buying the right size house and having the right size mortgage on that house is a key factor in your financial stability. A mortgage (long term fixed) leverages money by the tax savings generated by our current tax system and makes use of the fact that mortgage payments in the future will cost less due to inflation. A home valued at two to three times
your income with a mortgage of 50% to 80% is usually recommended.
5. Pay off credit cards/ consumer debt
Credit card and consumer debt can be one the biggest struggles people face on the road to financial freedom. It not only imposes a real monetary cost (interest), but it also can create an unhealthy attitude towards money and spending. Credit card and consumer debt can lead to overspending and living beyond your means. Credit card and consumer debt interest payments are not tax deductible like mortgage interest. Therefore, credit card and consumer debt should be eliminated.
These Five Fundamentals of Financial Success are not meant to be all encompassing,
but these fundamentals are generalizations that are meant to improve financial
Contribute to Charity– With the holiday season upon us, now is the time to consider making a business charitable contribution. You can donate money and/or usable items such as clothing, toys, and other goods, and claim a deduction for the fair market value. Be sure to get proper documentation or a receipt for your records.
Keep your Records Straight – Keeping your books in order throughout the year is critical. Use the time now to make sure everything is up-to-date and accurate so that you maximize your deductions and save your accountant time and billable hours when tax season rolls around. Read these tips from the SBA about Managing Your Small Business Tax Obligations.
Hire a Returning or Disabled Veteran – In November, the President signed into law specific tax credits for businesses that hire unemployed veterans. The Returning Heroes Tax Credit provides businesses that hire unemployed veterans with a maximum credit of $5,600 per veteran, and the Wounded Warriors Tax Credit offers businesses that hire veterans with service-connected disabilities with a maximum credit of $9,600 per veteran. Read more in this White House fact sheet:Returning Heroes and Wounded Warrior Tax Credits.
2. Are you contributing at least 10% to your 401k/403b or other retirement plans?
This question is obviously financial in nature and focuses on the importance of saving for tomorrow. It also brings with it tax benefits. Remember that many retirement contributions are pre-tax and will save tax dollars today. Contributions to ROTH and non-deductible IRAs are a couple examples of plan contributions that do not save current tax dollars.
3. What is your tax picture for 2011?
If you have not completed a tax projection for 2011, it’s a good time to do so. There is plenty of time left to make changes to your withholding rate or quarterly payments to positively impact your financial year. Tax planning is one of the most important aspects of financial planning and should be used to create maximum financial traction. Whether you are reducing the check you will have to write next spring or withholding less each pay period, it’s important to use tax planning to increase financial efficiency.