I've made a promise to myself to cut back, slim down and become fit this year.
While that promise refers to losing the weight I picked up with my third baby (OK, she's a toddler now), it's also the same New Year's resolution I've made concerning my finances.
An architect wouldn't build a home without a blueprint, so why do so many of us try to build our financial house without a plan?
"Most people have it all wrong about wealth in America," wrote Thomas J. Stanley and William D. Danko in "The Millionaire Next Door."
"Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend."
So, if you want to accumulate wealth and not debt, think of your finances as a pyramid, suggests Meridee Maynard, vice president for Northwestern Mutual, a leading provider of life insurance.
"A lot of people want to start in the middle and invest in mutual funds and risky ones at that," Maynard said. "You have to start with a basic foundation."
Begin with emergency fund
The foundation of your financial pyramid should include an emergency fund of three to six months of living expenses. Next, make sure you have enough life, health and disability insurance. Before building any higher, pay off your high consumer debt, such as credit card bills.
If you are too deep in debt to see a way out, you may need to seek help from a credit counseling organization. Go with a more established agency such as www.myvesta.org or one of the member agencies of the National Foundation for Credit Counseling at www.nfcc.org or toll free (800) 388-2227.
Focus on investments
Once you've got a handle on your debts, the rest of your pyramid should be investment oriented. Plan for short-, medium- and long-term goals such as saving for a car, a home, children's education or retirement.
Most important, take advantage of tax-deferred savings plans offered by your employer. According to a survey by Northwestern Mutual, only 6 percent of employees contribute enough to their 401(k) plan to qualify for their company's entire match.
"I don't believe the normal employee fully appreciates that the employer match is found money," Maynard said.
If your company provides a matching contribution to your retirement savings plan, do what you have to do to qualify for all that money (eat in, skip a couple of movies, cancel cable). If you don't, look at what you could lose.
Let's say you earn $50,000 and your company will match contributions to your 401(k) plan up to 6 percent of your total income. Beginning this year the maximum amount that can be contributed on a pretax basis to a 401(k) or 403(b) plan is $11,000.
But you decide to contribute only $500 a year to your 401(k). The company matches your contribution dollar for dollar. So you qualify for a $500 match. However, had you contributed the maximum 6 percent you could have gotten another $2,500. Now consider the power of compounding. That $2,500 at 8 percent could grow to $39,114 during 10 years or $123,557 in 20 years, according to calculations by Maynard. And you'll be saving an equal amount of your own money all tax-deferred.
Think about it. You are leaving some serious money on the table.
Educate yourself
As you build your pyramid and make your financial resolutions for the new year, include a promise to become better informed.
To that end the nonprofit Alliance for Investor Education has put together a list of 10 excellent Web sites that include information on mutual funds, stocks and bonds, estate planning, finding a financial planner and common investment scams.
For a complete list go to the Alliance Web site (www.investoreducation.org) and click on the link "Resolve to Save & Invest in 2002!" Some of the sites on the list include:
"Building Wealth: A Beginner's Guide to Securing Your Financial Future," Federal Reserve Bank of Dallas (www.dallasfed.org/htm/wealth/index.html). At this site you will find a useful budget calculator.
"Get the Facts: 20 Questions About Mutual Funds" from the Investment Company Institute (www.ici.org/quiz/get_the_facts_quiz.html). Test your knowledge of mutual funds. There are several links for more information on every right and wrong answer.
"Invest Wisely: Advice From Your Securities Industry Regulators," U.S. Securities and Exchange Commission (www.sec.gov/investor/pubs/inws.htm). This link provides tips on how to select a broker.
As Benjamin Franklin said, "An investment in knowledge always pays the best interest."
You may wince at the thought of making yet another New Year's resolution, especially about saving more or spending less, but don't think of this annual ritual as a fruitless endeavor but as an opportunity to become as financially fit as you can. It's always worth the effort.
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