It is hard to believe that the first half of 2008 is over, and it is time to get ready to finish the year. From the broad economic perspective, the Federal Reserve has signaled that it may stop lowering short term interest rates to better position itself to fight inflation. Unfortunately, the U.S. economy may be in the very precarious position of having both slow growth and rapidly rising prices.
First quarter economic growth, as measured by GDP, was a timid 1 percent, and the second quarter was probably not any better. Energy, food and commodity prices continue to rise in response to global demand. As a result, the stock market has taken it on the chin, and the Dow Industrial Average is down 14.4 percent year to date.
Finally, there continues to be no end in sight for the war in Iraq. This is certainly not a pretty picture, but with the upcoming presidential elections, there could be hope for a recovery in 2009. How are these economic factors affecting your financial plan?
On a more personal level, what has changed in your family's life? Have any marriages, divorces, births, health changes, pay raises, layoffs, retirements or graduations taken place? How have family changes affected your financial plan?
Today is a great time to measure your progress toward the achievement of your financial goals and to make mid-year corrections.
Cash management
If you want to achieve your financial goals, it is imperative to manage the major source of your potential wealth–your cash. Are there ways that you can take advantage of today's relatively low interest rates by possibly refinancing your mortgage or switching to a lower rate credit card?
Have you maximized your income potential? Would overtime or a second job for a few months allow you to remove the albatross of bad debt from your life? Consider alternative ways to reduce expenses, such as buying clothes during seasonal sale periods, cooking meals at home or using public transportation. If you have not set up a monthly cash-flow statement, use your last three months' income and expenses to establish a baseline and then track it monthly.
Investment Planning
The current tax law sets the maximum tax rate for dividends and long-term capital gains at 15 percent. Interest income and short-term capital gains continued to be taxed at higher rates. Do your current investments fit your long-term investment objectives and time horizons? Review your most recent 401(k), IRA and investment account statements. What has been their performance over the last 12 months and are your investments adequately diversified?
Tax planning
If you used a tax advisor in the past, consider meeting with your advisor to access your tax situation. Start by reviewing your 2007 tax returns, your most recent pay stubs and your investment account statements. Make a copy of your last Form 1040 and pencil in estimates of your 2008 income, estimated itemized deductions, withholding, credits and final tax due or overpayment. Are there ways to legitimately increase your deductions or defer income into next year and ultimately reduce your taxes for 2008?
Insurance and estate planning
Review your life, disability, health, long term care, and property and casualty coverage with your insurance agent. Is your coverage adequate and cost effective? Additionally, every adult should have a basic estate plan that begins with a will, durable power of attorney and a health care directive. Are these documents current and stored in a secure place? Also, make sure that the named beneficiaries on your pension plan, insurance policies, IRAs and similar contracts are current.
Now is a good time to work on making sure that 2008 will be a good year in your journey toward achieving your financial goals. Take the time now, during July, to make your mid-year financial corrections.
Michael G. Shinn, CFP, Registered Representative and Advisory Associate of and securities offered through Financial Network Investment Corporation, member SIPC.
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