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PERSONAL FINANCE / BILL SING

Basic Steps to Slimming Down in the New Year

January 06, 1991|BILL SING

Happy New Year? Hardly. This is the first new year in nearly a decade to begin in a recession.

All the more reason to start 1991 right by reviewing the state of your personal finances to see how well you're prepared for harder economic times.

"The conditions with respect to your career and investments are different now than they have been for eight years. We've lost sight of the previous tough times," says Jonathan Pond, president of a financial-planning publishing firm and author of "Safe Money in Hard Times."

"What a recession does is squeeze excess out of the economy," he adds. "We could all afford to squeeze the excess out of our personal finances."

Pond and other advisers suggest the following basic steps to review your finances:

* Prepare a household budget. Estimate your monthly income and expenses over the year to determine if you need to cut expenses, increase income or both.

To help you estimate expenses, start with last year's bills. Be sure to include regular payments such as mortgage or rent, taxes, utilities, telephone and loan payments, as well as irregular payments such as medical and dental costs, home repair and maintenance, auto repair and maintenance, and personal purchases.

As for the income side, see how you'd fare if you became a recession victim and got no raise, or were unemployed for six months, Pond suggests.

* Increase your income. Consider moonlighting, shifting savings into higher-yielding securities, a yard sale or part-time work. If you got a big tax refund last year, adjust your withholding to reduce the refund--you'll get more disposable income up front now.

* Reduce expenses. Increase the deductibles on your auto or homeowners insurance. Eat out less. Take less-expensive vacations. Reduce impulse purchases. Cut up your extra credit cards.

* Figure your net worth. List your assets and liabilities. Your assets include cash, savings, value of real estate, investments, household goods and personal possessions such as cars and jewelry. Don't overlook the cash value of your retirement plans and insurance policies, Pond suggests. But don't overestimate the value of your home.

"People tend to have an overstated opinion of the worth of their homes," Pond says, noting that people often forget to include the impact of real estate brokerage commissions.

Your liabilities include mortgages, loans, credit card debt, hospital bills--anything you haven't paid in full. Subtract liabilities from assets, and that's your net worth. If it's negative, look for ways to reduce your debts or spending.

* Organize your personal records. One priority in these tougher economic times might be to assemble all your investment records to see what you can sell quickly to raise cash, Pond suggests. Also, he says, make sure you have good records on your pension and other employee benefits, so you can seek what's rightfully yours if you lose your job.

* Review your insurance coverages. Be sure you don't have too little--or too much--of health, homeowners or renters, automobile, umbrella, disability and life coverage. See if you can boost your deductibles to save on premiums.

* Review your loan obligations. Add up your mortgages, home equity loans or second mortgages, credit cards, auto loans, student loans, insurance policy loans and other borrowings.

The total of your installment debt, excluding your home mortgage or rent, should not exceed 20% of your yearly after-tax income and not more than one-third of your discretionary income for one year, Pond suggests. (Your discretionary income is the amount you have left over after housing, food, clothing and taxes.) If it does, you have no business adding to your debts and should be trying to reduce them.

* Review your savings. Your goal should be to save at least 10% of your gross income. If you aren't, it's time to reduce expenses.

* Review your spending plans. Now may not be the best time to buy a home, car, expensive vacation, jewelry and other expensive items.

* Review your cash resources. Make sure you have cash and easily sold assets equal to at least six months' expenses.

* Review your investments. Are they appropriate for the risk you can afford? Are they adequately diversified? You should have different types of investments (stocks, bonds, cash equivalents, real estate), different investments within each type and different maturities.

Are your investments liquid? Some investments, such as real estate limited partnerships or collectibles, may be hard to sell at a reasonable price in a crunch. Are you prepared to take advantage of opportunities? In a recession, many bargains in stocks, bonds and real estate will undoubtedly appear.

* Review your tax-saving strategies. Do you know how the new tax rates and other changes will affect you this year? If you're in a high tax bracket, have you considered tax-free municipal bonds or tax-free mutual funds?

* Review your retirement savings plans. Are you contributing as much as you can to your 401(k) company savings plan? Do you know if you are vested in your company pension plan, and what you can expect to get if you quit working now?

* Review finances for your children. Do you have a plan for saving for their college education? Have you considered shifting assets to them to reduce taxes?

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