As a columnist for Kiplinger's Personal Finance magazine, Kim Lankford has received many letters from readers who want help recovering from the recent stock market tumble.
She has laid out some easy-to-follow, common-sense strategies in her new book, "Rescue Your Financial Life: 11 Things You Can Do Now."
Lankford stopped by The Saturday Early Show to explain how to balance multiple financial goals on a limited budget, pinpoint the best college savings vehicle and suggest four places to squeeze "extra" money from your budget.
According to Lankford, prioritizing financial goals is one of the hardest things for people to do. They want to know, when you have a limited amount of money to put toward savings and more than one big financial goal to reach, what do you do?
Retirement should always come first, Lankford says. Struggling to juggle retirement and college savings is common, she continues. However, there are many resources to help with college expenses - grants, scholarships, financial aid - but nobody is going to offer you financial aid for retirement.
Lankford explains you need to sit down and re-assess how much you need to save for retirement and how much time you have to do so. Then, you can determine how much money you should ideally be putting away. Your employer or your brokerage firm should be able to provide you with the tools to complete this task.
When saving for retirement, where you put your money counts. Lankford suggests investing in the following accounts, in the following order:
- Contribute enough to your 401K to get your employer match.
This is the only place you are guaranteed a 100 percent return on your money.
- Contribute to a Roth IRA.
Ideally you can contribute the maximum amount of $3,000, because this money can grow tax-free.
- Max out your 401K.
- If you still want to save more for retirement, then look into other accounts such as mutual funds and stocks. These are new additions to Lankford's list. In the past, she did not recommend investing retirement funds in taxable accounts because you had to pay such high taxes on your earnings. But now these taxes are much lower, making the accounts a good option.
If you're looking to save money for college, Lankford says 529 plans are your best bet because all of your earnings can be taken out of the account and used for college tax-free. Every state offers these savings plans, which essentially work like a mutual fund. You don't have to use your state's plan, but you should look into it because using your state's plan might make you eligible for a state income tax deduction.
Look for plans with low fees and a wide range of good investment options. Lankford particularly likes the age-based plans. These 529 plans invest aggressively when your child is young and then grow more conservative as your child ages - and you don't have to make these changes, your plan administrator takes care of it automatically.
Lankford dedicates a chapter in "Rescue Your Financial Life" to each of the following:
Eliminate expensive debt
Attack your high-interest debt. Lankford says it's worth diverting some of the money earmarked for retirement savings to pay off your debt. Chances are, the interest you're paying on your credit card debt is higher than the return you're earning on your investments.
Luckily, this is a good time to pay off debt because interest rates are so low. If your credit card has an interest rate higher than 10 percent, you need to look for a lower-rate card. If you have decent credit, you may be able to find rates as low as 4.9 percent. Lankford suggests you check out Bankrate.com to find cards with more competitive rates.
Lower your tax bill
Lankford says to look closely at your tax returns because there is probably a deduction or a credit you didn't realize you could take. She explains that many people accidentally overpay the government because they don't realize how many tax write-offs they can take.
Everybody's financial circumstances are different, but there are two tax savings available that put more money in most people's pockets.
First, don't forget that you can write-off your stock losses. Also, Lankford urges more people take advantage of their employers' flexible spending plans. You can set aside money - before taxes - to pay for health-related costs that aren't covered by insurance. Such costs include doctor visit co-pays, glasses or contacts, prescription drugs, etc. New for 2004, pre-tax money can also pay for over-the-counter medications such as cough syrup and cold remedies.
Cut your insurance costs
The cost of insuring a home has skyrocketed in recent years. Insurance companies are losing so much money on homeowners' insurance that they are refusing to insure some people and dropping others. Companies are particularly penalizing those who file small claims. You can avoid losing your insurance, and pay less for it, if you raise your deductible. Lankford suggests a minimum of $1,000.
While insurance rates in general have been on the rise, life insurance has actually become significantly cheaper in the last few years. If you're still in good health, you may be able to get cheaper life insurance, Lankford says.
Squeeze money from your home
Housing values are up and interest rates are down, a combination of events that can transform your house into a cash cow, Lankford says.
She says it's a good time to refinance your mortgage. Doing so can allow you to pay off the house quicker, or lower your payments and free up more money each month to increase your cash flow.
If you are trying to pay off debt or have a big expense on the horizon, Lankford says it's also a good time to get a home-equity loan. You can use that money for other expenses - just be careful. If you spend the money and fail to pay off your home-equity loan, you could lose your house.