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Californians Learning How to Succeed in Personal Fiances

Strategies to Avoid Ever Needing a Money Make-Over


In four years of publishing the Money Make-Over column, we've learned firsthand that there is a strong appetite among Southern Californians for help organizing their finances, and that even knowledgeable investors and savers want to make sure they are on the right track.

Often, we are asked what kind of lessons emerge from our experience reviewing and editing these make-overs. Although every person's financial circumstances are unique, there are certain questions and problems that come up frequently.

Today, we share some common strategies in personal finance that have been frequently recommended in Money Make-Over columns and summarize what experts often say about them:

* Some kind of spending plan, however informal, is essential.

Where does the money go? Many people who volunteer for Money Make-Overs have no idea.

Planners often suggest that clients track expenses. That doesn't mean you have to enter everything on a computer software program like Quicken or write it down in a notebook. But you should list your expenses at least occasionally so you can review costs and question whether you actually need everything on the list. You might be surprised at how much you're spending on things that don't really matter to you, while important goals--vacations, retirement, college educations--are being put off for lack of funds.

An alternative to making lists is the indirect, "out of sight, out of mind" approach. Use automatic transfers to whisk money to your savings and 401(k) accounts, and make a commitment to live on what's left, without tapping those savings or going into debt. Many people who profess to be clueless about money say this is the only approach that really works for them.

* Debt is a killer.

Many people's financial plans are undermined by the amount of debt they carry--particularly credit card debt. Planners say that borrowing for a home, a car to get you to work or an education can make sense. Most other debt simply prevents you from achieving your goals. Home equity loans can be especially dangerous for people who don't have the discipline to stop spending above their means.

And even otherwise "good" debt can louse up a financial plan if taken too far. People who borrow to fund a too-expensive house or a succession of fancy cars should consciously weigh their value against using more money to fund other goals, such as a comfortable retirement.

* Your standard of living is flexible.

Sometimes we hear that someone "can't do without" something, or, alternatively, "can't afford" something. But we tend to forget the truth: You can do without most everything and can often afford more than you think, especially if you are willing to make the required trade-offs.

It's always more enjoyable to raise your standard of living than lower it, but both directions are possible, and you can lead a happy, satisfied life at any number of levels of income and wealth.

* Strike a reasonable balance between saving for your own retirement and for your children's college education.

Readers have told us they agonize about not saving enough for the kids. But keep this in mind: Millions of successful adults paid for their own college education. Your children can too.

It's true that students who graduate from college or graduate school with little or no debt have an enormous head start on saving for their own retirement. Parents who can afford to help certainly give their children a wonderful gift. But not all children take advantage of such a gift the way parents intended. Some children might prefer that you ensure your finances first so you don't need their financial help later on.

In make-overs published in The Times, planners have repeatedly argued that retirement should be funded before college savings. That keeps the parents in control of any potential college funds and maximizes the advantages of tax-deferral plans.

Remember, too, that college savings is not the only good investment in your children. Maybe you prefer to invest some during their youth--say, in the form of a second home in the country, a summer camping experience or by supporting a hobby. Such spending may be as--or more--important in the long run than minimizing their future college-debt loan.

* Don't leave money on the table.

While there is no such thing as truly "free money," there are ways to reap big financial returns for relatively small sacrifices.

Most companies that offer 401(k) plans, for example, will match a percentage of employee contributions. Maximizing such matching is about the easiest way to get instant high returns on an investment--often 50% to 100%.

There are several other easy winners. Workplace tax-saver plans--sometimes called flexible spending or 125(c) plans--allow you to put aside pre-tax money to pay medical or child-care expenses. Tax breaks such as the child tax credit, education credits and the earned-income credit are available to many people, depending on their incomes.

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