Last Updated Dec 29, 2010 2:12 PM EST
1. Cancel those dangerous rewards cards - the cards where you earn points for every dollar that you charge. On the surface, the points give you free airline miles, cash back, or discounts on catalog merchandise. But why would you think that a bank offers anything truly free? You're paying for your own rewards, with the interest you're charged on the balances that you carry forward every month.
What's more, rewards cards tempt you to charge more than would otherwise be the case. A new study by the Federal Reserve Bank of Chicago found that people with cash-back cards spend more, and build up more debt, than people with ordinary cards. Their debts grew faster than their spending, suggesting that they reduced their monthly payments. That would have added even more to their interest costs.
Rewards cards make sense only if they charge no annual fee and you pay every monthly bill in full. Only then are your airline miles truly free.
2. Use your Social Security tax cut to add to your savings or reduce your consumer debt. You might not notice the tax cut because you don't get the money in a lump sum. It comes in the form of slightly more cash in your regular paycheck. Most likely, it will slip through your fingers in everyday spending. That's good for the economy but not the best result for you.
The tax cut equals two percentage points of your earnings. Employees will pay 4.2 percent in 2011 instead of the usual 6.2 percent. The self-employed will pay 10.4 percent instead of 12.4 percent. If you earn $80,000, that's a gain of $1,600 for the year. At $106,800 in earnings (the maximum amount that's subject to the payroll tax) or more, you pick up $2,136.
Those amounts sound large but feel small when restated as an extra $61 or $82 in each biweekly paycheck. You can see why the dollars are easy to overlook.
To capture this tax cut for your own, personal future, first use the calculator at Kiplinger.com to find out exactly what it's worth. Then arrange to have that amount of money saved automatically. You might raise the contribution to your 401(k) or Individual Retirement Account, add to the sum that goes automatically toward your debts, or pop it into a savings account. If it hits your checking account and stays there, it will vanish without a trace.
(Note that low-income workers, who qualified for Obama's expiring Making Work Pay tax credit, will suffer a reduction in their take-home pay. The tax credit was worth more to them than the cut in the Social Security tax. Did you hear people fighting this tax increase? Neither did I.)
3. For adults and young people seeking higher education in 2011, chose a school whose costs keep you out of debt. Students don't realize that, when they take a government or private loan, they're potentially selling themselves into financial slavery. If you lose your job, or don't earn enough to repay your student debts on time, late fees and interest charges mount fast. Delayed-payment plans only add to your debt.
You can't escape an unpayable student loan by declaring bankruptcy. You'll carry it, and a wrecked credit history, all your life. The same thing can happen to friends and relatives who co-sign student loans. No college or trade school is worth this risk. Choose a community college or a four-year school that will cover most of your costs. Schools - including famous ones - that turn a blind eye to the burden of loans should be taken out and shot.
4. Buy a home only if you're putting down roots and feel happier owning than renting. Otherwise, don't. Low as prices are, they could go lower. Homes are a lifestyle choice, not a good investment - even with the tax deductions.
Eventually, home prices will rise again but probably at a pace too slow to cover the huge expenses of owning, including closing costs, insurance, repairs, improvements, net interest costs, real estate taxes, and sales commissions when you move. There's a dividend to home owning: you're saving yourself the cost of rent. For investors, however, stocks pay dividends, too. Over many years, the stock market outperforms real estate, by far.
If you're thinking of buying a "cheap" Florida or Arizona condo for investment purposes, make very careful calculations. What's the vacancy rate on rental properties? Will your rents cover all your expenses, including renovations and ongoing costs when you are between tenants? Will you have positive cash flow? It's a bad investment if you have to pay out-of-pocket each month.
5. Rekindle your affair with stocks. It's hard to fall in love again, after the emotional breakups of 2000 and 2008. Investors have taken money out of U.S. stock mutual funds for four years in a row, the Investment Company Institute reports.
But look what you missed, during your long funk. Here are the stock market results through December 28 for 2010 alone, as measured by The Vanguard Group's low-cost index mutual funds (with fees subtracted and dividends reinvested):
Stocks in Standard & Poor's 500 index - up 14.8 percent; socially responsible stocks - up 14.9 percent; smaller U.S. stocks - up 28.3 percent; emerging markets - up 16.1 percent; total international stocks (counting stocks in both the developed and emerging countries) - up 9.6 percent; total U.S. stocks (both large and small companies) - up 17.2 percent; and Real Estate Investment Trusts - up 28 percent.
Vanguard's intermediate-term bond fund returned 8.1 percent, so you might think that your flight to bonds was good enough. If you stay there, however, you're looking backward. No one can guarantee which market will outperform. But the new federal stimulus program (more spending and more tax cuts), plus cash-rich corporations and more open consumer wallets, generally should favor stocks.
There's never a world without risk. High on the list for 2011 is a meltdown in the municipal bonds of struggling cities and states and the certain appearance of a scary "unknown unknown." But diversify anyway. Think of how much better your 2010 would have been if you'd followed that eternally accurate investment rule.