Is there some fundamental rule of personal finance that can be used by everyone - young and old, rich and not-so-rich, risk-lover and Nervous Nellie?
Yes: Save more.
Whatever your financial goal, the odds of achieving it are improved if you put more into savings and investments. The start of a new year is a good time to crank things up.
Plan to save and invest a specific amount every month, or else it's too easy to let things slide.
The best way is with an automatic plan such as a 401(K), which takes money from your pay and puts it directly into an investment such as a mutual fund.
If you're already putting the maximum allowed into such a plan but can afford to invest more, have your brokerage or mutual fund account automatically draw money every month from your bank account. Your broker or fund company can tell you how.
At a minimum, the amount you set aside should be increased every year by the inflation rate. If you don't do this, the value of your set-aside will gradually decline, chewing away at your returns.
Though full-year figures aren't in, it looks like inflation ran about 3.5 percent in 2004. So, for every $100 you set aside last year, you should put in $103.50 this year.
How do you find extra money for savings and investment? By cutting expenses.
If there's not some obvious extravagance to scale back or eliminate, probe the dim corners. Write down how every penny is spent for a month and you'll find all sorts of little expenses that can be cut with little pain - snacks, rental movies, unviewed cable channels, excess cellphone minutes ... it all adds up quickly.
After all, a person who set aside $10,000 last year has to find only $350 more this year to make that inflation adjustment.
Now that it's January, it's too late for most of the maneuvers you could have used to reduce your tax bill for 2004. But there's an exception - you have until April 15 to make your 2004 IRA contribution, and some investors are eligible for tax deductions on money put into traditional IRAs.
The maximum contribution is $3,000 per person, or $3,500 for those age 50 or older by the end of 2004.
Rules on tax deductions are complex, so check with your tax preparer or the company that has your IRA. Here are the basics:
If you are single and not covered by any kind of retirement plan at work, your entire contribution is deductible. Married couples get full deductions if neither spouse has an employee retirement plan.
Single people who do have employee plans get full deductions so long as their "modified adjusted gross income" is below $45,000. The deduction gradually falls to zero as MAGI rises to $55,000.
If you are married and both of you have employee plans, contributions are fully deductible if MAGI on your joint return is below $65,000. The deduction is gradually phased out as that figure rises to $75,000.
If you have an employee plan but your spouse does not, the $65,000-$75,000 figures apply to you. For your spouse, the figures are $150,000 to $160,000. So even if you cannot get a deduction, your spouse might.
MAGI is the adjusted gross income figure calculated on your tax return, with certain items added, such as the amount claimed for student loan interest payments.
IRA contributions cannot exceed earned income - basically, money from a job rather than savings or investment profits. However, a non-working spouse, or one very low income, can contribute so long as the couple's combined earned income exceeds the amount put in.
Tax matters such as those I've just described are a terrible headache. That's why so many of us put them off. Unfortunately, last-minute filers are the most likely to make mistakes that cause them to miss deductions or raise eyebrows at the IRS.
If you do nothing else on taxes in January, assemble the things you'll need in February and March.
Find a place to put all the tax documents that will come in the mail. And get hold of a good tax guide - the phonebook-sized paperbacks that show up in bookstores early in the year.
I like J.K. Lasser's Your Income Tax 2005 and The Ernst & Young Tax Guide 2004. Each is $16.95.
Anyone with a computer should try Intuit's TurboTax software, which I've used for several years. It lists for $39.95 but can often be found for $10 less. Buy it at any software store or online at http://www.intuit.com.
