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Seven Steps to a More Prosperous 2007
AOL MONEY: Business Week Online (Lauren Young)

Make a New Year's resolution to get your personal finances in order. Here are some pointers to help you get started.

It's the New Year, and, along with resolutions to go on a diet and hit the treadmill at the gym more often, it's time to get fiscally fit.

But where do you start? We asked a team of financial advisers to give us their top personal finance recommendations for 2007. In addition, they reviewed the finances of actual investors, examining portfolio holdings, insurance coverage, and estate plans to provide some real-world advice. Here are some money-savvy moves to make in the New Year:

1. Don't Skimp on Disability and Long-Term Care Insurance

Rick Spickelmier, 47, is the chief technology officer at a software startup in Berkeley, Calif., that offers limited benefits. Spickelmier isn't too worried, since he earns more than $150,000 per year, with big bonus potential, and he has a nest egg valued at more than $1 million.

Even so, Warren F. McIntyre, a certified financial planner at VisionQuest Financial Planning in Troy, Mich., says Spickelmier needs disability insurance. "He should consider a policy that permits him to buy an increased benefit as his income increases," McIntyre says.

In addition, many disability policies now offer long-term care coverage, and Spickelmier should take that coverage, if it is available. "Self-insuring a long-term disability is very expensive," McIntyre notes. "You can't count on Social Security disability to provide adequate coverage.

Another incentive for long-term care insurance is that it can help you reduce your tax bite. Many states have begun providing tax credits or deductions from state taxes for long-term care insurance premiums of tax qualified policies.

That's one reason long-term care insurance would make sense for Joe De Cola, 69, a General Electric retiree. Because he lives in New York, De Cola could get a 20% tax credit for any long-term care insurance premiums paid, says Tom Henske, a partner at Lenox Advisors, a financial advisory firm in New York.

"Getting a tax credit will significantly lower the price of long-term care insurance," Henske says. And given that De Cola's portfolio and real estate holdings are valued at more than $1 million, long-term care insurance could help protect assets for his four children.

2. Get a Life... Insurance Policy

Since he retired from GE a few years ago, De Cola has been living off a generous pension of about $5,000 each month. But he cancelled his life insurance policy when he left the workforce. Bad move, says Alan Haft, a financial adviser in Boca Raton, Fla.

"Joe would only have to take a small slice of his liquid assets to insure a large portion of his estate," Haft says. He recommends De Cola consider a universal life policy with a death benefit of $1.5 million. The investment can grow tax-deferred inside an insurance policy designed to have cash value.

If De Cola needs to tap this money in the future, he can withdraw the cash value without penalty. With a one-time deposit, De Cola can guarantee his estate $1.5 million through the life insurance death benefit. "Now a magical thing happens," Haft says. "He can spend more of his money, especially during these very important years where he can still travel, health is good, and he has the energy to do the things he wants."

3. Save for College

Ryan and Linsay Shirley, both 30, of Highlands Ranch, Colo., are the proud parents of a five-month-old girl named Jaidyn. But since Linsay left her job as a software consultant to stay at home with their daughter, money has been tight. So far the Shirleys haven't put much away for Jaidyn's college education. Yet a $200 investment per month in a 529 college savings plan that earns a return of 8% annually would be worth $97,000 when Jaidyn is 18. If the Shirleys wait until their daughter is 9, they would only have $32,000 set aside for college.

"There is no time like the present to get saving for college," says C.E. Scott Brewster, a certified financial planner in Brooklyn, N.Y.

Brewster notes that the Shirleys are lucky to live in Colorado—one of more than 20 states that offer a state tax deduction for making a contribution to their state's 529 Plan. (Note: Most states only allow the deduction for contributions to their own state's 529 Plan. More states are considering deductions for contributions to out-of-state plans.)

Because they live in Colorado, the Shirleys should look at Colorado's Direct Portfolio College Savings Plan, where they can pick an age-based savings portfolio managed by Vanguard Group.

The age-based plans work just like a target retirement fund, which gets more conservative as the owner approaches retirement. An age-based option for a 529 Plan gets more conservative as the child approaches college. So when the child is 5 months old the plan is almost entirely in stocks, and when the child is 18, the plan is primarily invested in bonds. "This is a very simple yet powerful way to save for college," Brewster says.

If you are planning to go back to school in the next decade, you might want to set up a 529 plan for yourself, says Bill Stone, senior vice-president and investment director at PNC Wealth Management. If you don't use all of your savings on school, you could then switch the beneficiary to be one of your children.

One excellent Web site to help navigate the confusing world of 529 Plans is: www.SavingForCollege.com . "This Web site is priceless for helping parents and financial advisers evaluate 529 Plans," Brewster notes.

4. Put Your 401(k) Back on Track

January is the perfect time to give your retirement plan a check-up. This year, most people will be able to contribute up to $15,500 to a 401(k) plan at work—$21,000 if you're age 50 or older. If you can't afford to put that much aside, make sure you contribute at least enough to qualify for the full company match. You don't want to miss out on free money. If you don't have a retirement plan at work, consider opening an IRA, Roth IRA, or SEP plan.

Next, study the investment selections in your 401(k), especially because companies change managers and add investment options all the time. Make sure you compare peer performance among your investment selections. "Often not all fund options in an employer's 401(k) plan are the top performers in their respective peer investment category," says Joe Sorrano, a financial adviser at Merrill Lynch in New York.

That's why it also makes sense to review the investment options in your spouse's retirement plan. You can use the two plans to create a total portfolio asset allocation. For example, if your wife has a great international stock fund option, and you have an excellent bond fund, use your wife's account to invest your household's retirement money overseas and use your retirement plan to make fixed-income bets.

David Brady, president of Brady Investment Counsel in Chicago, also urges investors to examine the underlying expenses of the funds in their retirement plan. "Look to weed out underperforming funds with high expense ratios," since they can erode returns over the long haul, Brady says.

Keep in mind that getting cost information on these accounts can be tough. The best place is your company's benefits department.

Finally, for investors with lower incomes, the new Roth 401(k) is an excellent alternative to a traditional 401(k) plan since "you will likely get more value from tax-free distributions in the future than from the current tax deferral," says Morris Armstrong, a financial adviser in Danbury, Conn.

5. Make Your Cash Work

Most advisers say you should have three to six months of expenses set aside in an emergency account. If you don't have an emergency stash yet, start building one slowly, setting aside part of your paycheck each month and directing any spare cash into the account.

And make sure your cash is working for you. If the return on your cash savings is less than 5%, open an account with an Internet bank such as EmigrantDirect (emigrantdirect.com), says William R. Driscoll, a financial adviser in Plymouth, Mass. "These are FDIC-insured accounts paying over 5% interest with no minimums or time requirements," Driscoll says. For other high-yielding accounts, check out bankrate.com.

6. Get Your Estate in Order

Young couples with young children, like the Shirleys, often neglect basic estate planning because they believe they do not have assets to plan with. "The single most important 'asset' they have is their child," says Milton Balbuena, chief investment strategist at Contango Capital Advisors in Berkeley, Calif. Naming a guardian in a will is the most important estate planning that they can do, he says.

In addition, individuals like Spickelmier, who is single, need estate planning. The focus should be on health-care directives and who should make these decisions for you, Balbuena says. Additionally, if you want your assets to transfer to charity, you need to name the charities in your will or living trust.

7. Free Up Your Credit

You are entitled to one free credit report per year from each of the three main credit bureaus, so January is a great time to tap the first report, then monitor your credit by getting another free report every four months. To review your credit report, go to www.annualcreditreport.com.

Taking a fresh look at your finances is a great way to kick off a prosperous New Year.

Young is a Personal Business editor for BusinessWeek.

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