No one can predict with any great certainty the financial outlook for 2016, especially with the national elections looming in November. Nevertheless, here are 10 top money management moves that make sense for the rest of this year.
1. Diversification: If volatility in the stock market has taught us anything, it is the importance of diversification. Diversification means spreading your investments over different asset classes, as well as investing within those classes. Conversely, if your investment focus is extremely narrow, the risk of a disaster is greater.
2. Asset allocation: This investment principle often works hand in hand with diversification. By assigning various percentages to the assets in your portfolio, you increase the likelihood of meeting your main objectives and addressing risk aversion.
3. Portfolio rebalancing: Even the best investment design can skew over time. The right portfolio is a moving target that you must keep an eye on. For instance, if you have adopted an asset allocation plan, now is a good time to review it and make the necessary adjustments.
4. Tax efficiency: As you become more proficient at investing, you should place a greater emphasis on being tax efficient. Factor the tax ramifications into your investments. Remember: It is what you keep after taxes, not how much you earn, that really matters.
5. Budgeting: Spending more than you make is a common problem. It’s helpful to draw up a monthly budget that takes all your expenses into account. Give yourself a little leeway—everyone is entitled to splurge occasionally—but stick close to the guidelines throughout 2016.
6. Debt reduction: Although some forms of debt, such as the mortgage on a house, may be perfectly acceptable, you should do your best to reduce your other debt load, especially if you are paying interest at relatively high rates. In some cases, debt consolidation may be advisable.
7. Emergency funds: The old axiom about saving for a rainy day is true. Squeeze some extra savings out of the monthly budget—even if you do not think it is critical. A sudden job loss or unexpected health issue can change things in a hurry.
8. Retirement plan contributions: If you already contribute to an employer plan such as a 401(k), keep plugging away. In fact, where you can afford to, you might increase contributions for 2016. The money in your account continues to grow on a tax-deferred basis until it is withdrawn—usually, not until you retire.
9. Traditional and Roth IRAs: Qualified plan contributions may be supplemented by traditional and Roth IRAs. Because Roths offer future tax advantages, you may choose to convert IRA funds into a Roth this year and pay the resulting tax. If you converted in 2015 and want to undo it, you have until October 17, 2016, to do so.
10. Estate planning: Finally, look forward into the future. Fine-tune your estate plan by addressing the changing needs of your family. When possible, maximize the benefits for your heirs with a minimum of tax erosion. Rely on your tax and financial advisers for assistance.