2007 has been an up and down year in the stock market. The economy has struggled;
gas prices are up and people are losing their homes at an alarming rate. Since it’s time
to make your New Year’s resolution, we thought we’d suggest a few ideas that can
bolster your financial situation. We offer three possibilities that may or may not fit your
situation. If the first one doesn’t apply, congratulations! You’re already off to a good
start.
Resolution #1 Eliminate Your Credit Card Debt
If you have an ongoing credit card balance, a great New Year’s resolution would be to
pay it off. Credit card interest rates are exorbitant. Focus first on the highest interest
rate balance. If you have extra cash in the bank (not likely), a small mutual fund or a
stock in a non-retirement account, use it to pay down your credit card balances. If you
typically receive a large tax refund, change your withholding and use the extra cash to
pay down the debt. If you have multiple credit cards, consolidate your accounts to the
lowest interest rate card. Review your budget and cut out discretionary purchases. Do
you really need that latte at Starbucks every morning? Pack a lunch for work. Join a car
pool. Get creative.
We don’t recommend that you take out a home equity loan to pay off your credit cards.
It sounds like a good approach, since the interest in most cases is then deductible. But,
more often than not, after the credit cards are paid off, people are tempted to run the
balances up again. Then, you’d be worse off with both excessive credit card debt and
home equity payments to make. Using a home equity loan to pay off credit card debt
requires discipline. If you’re disciplined, you can pay off the debt without using a home
equity loan. If you’re not disciplined, it’s likely that a home equity loan will just make your
situation worse.
Resolution #2 Revamp Your Investment Portfolio
If you are like many of our clients, you think you’re well diversified but in reality have a
high percentage of your portfolio invested in large company U.S. stocks. Our clients
often think they are well diversified because they own a large number of mutual funds.
Often, however, many of the funds are large stock mutual funds that contain many of the
same stocks. You might also have a number of funds with high management fees and in
many cases may own too much stock in the company you work for. You may be holding
on to losers that you should sell but are paralyzed by your reluctance to realize a loss.
On the other hand, you could be holding on to winners that should be sold but hesitate
to pay the capital gains tax.
You would be wise to seek professional help with this resolution. See our recent article
titled “Are You Getting the Best Advice?” for questions to consider in choosing a
competent advisor. A copy is included on our website in the “In the News” section.
Resolution #3 Create an Estate Plan
No one wants to think about their death. And, creating an estate plan won’t
necessarily enhance your current financial situation. It will in fact cost you a few bucks.
But chances are it will make a big difference to your survivors, both financially and
mentally. At a minimum you need a will, durable power of attorney and health care
directive. You need to make sure you’ve specified beneficiaries on all your retirement
plans, insurance policies and IRAs. It may make sense to have a trust, especially if you
are single, widowed or will be subject to estate tax. If you have a trust, make sure you’ve
properly funded it. With this resolution too, you should seek the advice of a competent
attorney and financial advisor.
We could suggest many more possibilities for your 2008 New Year’s resolution.
Hopefully one of these may make “$ense” to you and help you, or at least get you
thinking of another that will improve your financial situation. We all know we could
probably use a little of that! We hope our weekly advice has been helpful and that you
have a wonderful New Year!
David C. Patterson, CFP® and Erin Patterson, CFP® are the owners of Patterson Advisors, LLC, a fee-
for-service-only financial advisory firm. Patterson Advisors, LLC is a Registered Investment Advisor,
registered with the State of Michigan, helping clients in Waterford, Clarkston and Royal Oak, Michigan
as well as other Oakland County, Michigan communities . Visit www.pattersonadvisorsllc.com for more
information or call 248-674-2108.
Published in the Oakland Insider, December, 2007, Re-titled: Resolutions That Make
Good $ense
Resolutions That Make $ense
By David and Erin Patterson