Posted on: Tuesday, December 23, 2003

Kick off New Year with a financial plan

By Deborah Adamson
Advertiser Staff Writer

When the last Christmas gift is opened and the tree is put away, the merry spirit of the holiday season inevitably gives way to some regrets — why did you spend so much?

That $49.95 blinking snowman sweater you wore to the office party seemed so adorable at the store. Now it looks like a mistake — another purchase to add to the mountain of credit card bills incurred during the holidays.

When you're putting together your New Year's resolutions, getting your finances in order should be at the top of your list.

"Without a solid financial base, any other challenge you face is amplified," said Kristine Castagnaro, executive director of the Hawaii Council on Economic Education.

If you're already struggling with health problems, you don't want to worry about not having money to pay for your medicine. A layoff is less stressful if you don't have credit card bills.

"It does give you peace of mind," she said. "It's one less worry."

Here are some tips before you finish your holiday shopping to kick off the New Year on a better financial footing:

• Create a realistic budget. Set up a monthly budget for your household expenses and make sure to include bills that come a few times a year — car insurance and maintenance, property taxes, life insurance, vacations, birthday and Christmas presents and others, said Rosa Hotz, financial educator at the Hawaii State Federal Credit Union.

Expenses that aren't budgeted for the year or arrive unexpectedly often break the bank for someone who spends down every paycheck.

For instance, if you think you'll spend $1,200 to visit relatives in California next Christmas, include $100 a month in your budget.

Pay $600 twice a year for car insurance? Budget another $100 monthly — and so on.

If these nonhousehold costs run you about $320 a month, make arrangements with a bank or credit union to withdraw that amount directly from your paycheck into a separate, free checking account. Don't link an ATM card to the account to minimize temptation.

Getting money as a Christmas gift? Put it in this "freedom" account, according to Mary Hunt, self-described editor-in-cheap of California-based Cheapskate Monthly, a newsletter that has several hundred subscribers in Hawai'i.

• Pay off your credit card bills. Let this Christmas be the last time you added to your consumer debt and pay off any accumulated expenses, Castagnaro said.

Such belt-tightening means you'll have to live more simply. But you don't have to sacrifice quality of life. Instead of going to the movies for entertainment, attend free screenings at "Sunset on the Beach."

Also, take advantage of the many free things to do in Hawai'i such as hiking and swimming. When was the last time you went to the beach?

• Join your company 401(k) or 403(b) plan. Don't keep putting off joining the company retirement plan, especially if your employer puts in matching funds for money you deposit. Put in the maximum that you can afford — even it means $10 a paycheck. It may not seem much, but over time your savings would multiply with the effect of compounding.

• Refinance your mortgage. Get a refi if you haven't done it yet or if rates have dropped enough to warrant another go, Castagnaro said. Use the extra money you'll save to accelerate payment of your credit card and other debt.

• Take advantage of tax benefits before the end of the year. Self-employed people who haven't yet done so should consider setting up their retirement plan by Dec. 31 — whether it's a simple IRA, SEP-IRA or solo 401(k), said Marilyn Gagen, an accountant and past president of the Financial Planning Association, Hawai'i chapter. That way, contributions could be tax-deductible by next April.

Small businesses might consider buying such new equipment as a PC before the year's end so they can take the 50 percent depreciation write-off when they file taxes next year, Gagen said.

If you wait until January to buy, you'll still get the 50 percent depreciation — but not until you file taxes in 2005.

You can also pay your property taxes now and get a tax deduction next year instead of waiting until 2005, Gagen said. To find out how much you owe in Honolulu, go to www.honolulupropertytax.com, a city Web site.

Since the stock market did well this year, you might consider selling other losing investments to offset them. The idea is to match your capital gains — profits from investments — against your capital losses to minimize taxes.

• Revisit your wills and trusts. Update your wills and trusts if you haven't looked at them in three to five years or you've had a life-changing event such as buying a house, retiring, having a baby or moving to the Islands.

And you should have a will if you have any children under 18, Gagan said. If something happens to you and your spouse, a court could appoint a guardian to oversee their affairs. It's better if you specify their guardians in your will.

It's also a good idea to have a trust if your assets are complex or your heirs, including young children or disabled relatives, need someone to manage their finances.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.