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Sunday, 30 December 2007

Six Moves for a Prosperous New Year

by Kimberly Lankford
Thursday, December 27, 2007
provided byWhat should I be doing now to get my finances on track for 2008?

Now is the perfect time to get your financial house in order. You may be flush with cash from holiday gifts and a raise or bonus at work. Or you may be dreading the credit-card bill that arrives in a few weeks, reminding you how much you spent for the holidays. Either way, a few key steps can help you pocket more cash in 2008. Here's what you can do now so you can spend a lot less time worrying about your finances throughout the year:

1. Take advantage of higher IRA limits
You'll be able to save an extra $1,000 in your IRA in 2008, when the contribution limits rise to $5,000 (you can contribute $6,000 for the year if you're 50 or older in 2008). Make it easy by signing up to have your contributions deducted from your bank account every month -- $416 per month will get you to the $5,000 maximum by the end of the year.

Have some extra cash now? You still have until April 15, 2008, to make your $4,000 IRA contribution for 2007 -- where a holiday gift or year-end bonus can grow substantially through the years.

2. Stretch your raise even further.
If you'll be making more money in 2008, use some of it to boost your 401(k) contribution. You won't notice the difference if you make the change before you get used to having the extra money.

You can contribute up to $15,500 to a 401(k) for the year (or $20,500 if you're 50 or older). And since the contributions are pre-tax, making the maximum contribution will lower your paycheck by only $11,625, if you're in the 25% tax bracket.

Even adding just a few hundred dollars can make a big difference over time. Contributing an extra $200 per month for 25 years can boost your account by $190,000, if your investments return 8% per year. You'll only see $150 less in each paycheck if you're in the 25% bracket. Plus, you could get free money if your employer matches your contributions. For example, a 50-cent-per-dollar match is like getting an extra 50% return on your money.

3. Focus on high-interest debt
Paying off a credit card with an 18% interest rate can save you hundreds of dollars in interest. Make it your first debt priority in the New Year.

Consider this: If you have a $5,000 credit-card balance with an 18% interest rate and make only the minimum payment each month (4% of your debt, which starts at $200 the first month), it would take 12.5 years to pay off the balance and cost $2,916 in interest. Increasing your monthly payments to $500 would pay off the debt in less than a year and save you more than $2,000 in interest costs. Better yet, use a big chunk of any holiday money or year-end bonus to pay off the bill in full -- so you won't owe any more interest on the balance at all.

4. Start gathering your tax records now
You wouldn't want to miss out on valuable deductions because you're scrambling around at the last minute. See Track Down Your Tax Records for an idea of what documents and receipts you'll need, and start sorting them into folders.

5. Put your bills and savings on autopilot
Want to make sure your finances stay on track all year long? Set 'em and forget 'em. Sign up for online bill paying and automate as many payments as possible, so you don't have to think about it during the year. You'll be less likely to miss payments that could result in late fees, higher interest rates and cause your credit score to take a hit.

Treating your saving and investing as a fixed expense each month -- and arranging to pay that "bill" automatically -- is another great way to stay on track.

6. Protect your assets
Just in case disaster strikes in 2008, make sure you're covered. Check to ensure you have enough homeowners insurance, add extra coverage if you receive valuable gifts for the holidays, and run around your house with a camera to update your home inventory.

Meanwhile, see if you can lower your premiums by boosting your auto and homeowners insurance deductibles to at least $1,000, which can cut your costs by up to 15% on each policy and make you less likely to file a small claim that could get you dropped by your insurer.

A crucial part to preparing for an emergency is a stash of cash. Keep at least three- to six-months' worth of expenses in a liquid account so you don't end up in debt if you have unexpected bills.

Copyrighted, Kiplinger Washington Editors, Inc.

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