As we roll toward the holiday season, we should think about what New Year’s resolutions we might make to improve our financial lives in 2012. Below are three items to consider.
1Review your liability policy. How long ago was it when you bought your house or a car? Both purchases require you to speak with an insurance agent. Unfortunately, most people consider those set-it-and-forget-it policies, when in reality they should be reviewed periodically. Many people have stayed in their homes for decades without having revisited their liability policies, which can be a very costly mistake.
In the case of a family that recently moved out of Baltimore, one household head called an insurance company to alter its home and automobile policies. That person knew that the premiums would drop after leaving Baltimore due to the city’s high break-in rate. Sure enough, they did — the car insurance premiums alone dropped 40%.
Not everyone is in the process of moving out of a city with a high crime rate, but reviewing policies is still a good idea. You may well find that your home is underinsured, maybe because you bought a less expensive policy when you were younger and needed to save money. Today, with more resources at your disposal, you may want to maximize your insurance coverage to protect what you have.
2 Review your investment policy. A sound investment policy should be the guiding principle for every wise investor. After all, when the market is in turmoil and contradictory advice is coming from every direction, how will you make the right investment decisions?
The summer of 2011 started off badly. The troubles in Europe and the debt/deficit debate in Washington, D.C., shook Wall Street (not exactly a place that enjoys many unknowns). As the fiscal debate crept closer to the August deadline, the U.S. equity markets cratered, falling as much as 15% in four weeks.
For many people, it felt like the market disaster of 2008 all over again. Some wondered whether they wanted to remain invested in the stock market at all. Some ended up modifying their policies to match the new economic conditions, while others concluded that their initial decisions were best.
Both groups were right. The fact is, investors should take into consideration their risk capacity — how much risk they can afford to take, even more than their risk tolerance — how much risk they are willing to take. There’s an important distinction between the two. Your risk tolerance is related to your personal peace-of-mind, while your risk capacity bears directly on your financial situation.
If your only guideline for your investment policy was a six question quiz that told you whether or not you are an “Aggressive” or “Conservative” investor, then you need to revisit that policy.
3 Simplify your life. When Steve Jobs passed away in October, he left behind a technological legacy that literally has changed the shape of our civilization. But he also gifted us with some truly profound advice: “Simple can be harder than complex. You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”
Our lives these days are increasingly complex, with the financial aspects among the more dizzying. What’s your tax strategy? Are your car and homeowner’s policies in line with your umbrella policy? Are you saving enough for your child’s college education? How about your own retirement? What’s your business succession plan? You get the idea.
With that in mind, what can you do to simplify your financial life? Is having four different advisers the right way to keep your eggs in separate baskets … or does it just add more confusion? Do you have multiple bank accounts or CDs at different institutions because the rate is 0.1% better at one place than the other? Are your liability policies all with one carrier? Most importantly, have you put a financial plan in place, and do you review it regularly to keep yourself on track?
Now is a great time to re-evaluate these decisions and simplify an already complicated part of modern life. While financial decision-making can be complex, ultimately, it isn’t rocket science. You can take small, incremental steps right now to significantly improve your life in the coming years. That’s an investment you can’t afford to pass up.
William Bissett, CFP, is a wealth manager with Pinnacle Advisory Group in Columbia. He can be contacted at 410-995-6630 and wbissett@pinnacleadvisory.com.
