Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, April 17, 1995 TAG: 9504170014
SECTION: MONEY PAGE: A-8 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
Are you financially prepared to deal with a sudden drop in income? Could you cope with a large unanticipated expense? Do you have adequate homeowner's insurance? What can you do to reduce your tax bill next year? You need a ready answer to these and other financial questions.
The Virginia Society of Certified Public Accountants says there are several areas of personal finances that most of us need to look at regularly.
One is savings strategy.
No matter how large or small your income, it's vital to get into the savings habit. The amount you save depends on your own circumstances, such as your age, income, current expenses and financial goals.
Certified public accountants recommend that the average person should save 7 percent of pre-tax income if they are begining a regular savings habit at age 25. If the habit doesn't begin until 35, the amount put aside should rise to 10 percent of gross income and 18 percent at age 45 and 35 percent if saving begins at age 55.
If you're not saving regularly - or lack the discipline to do so - consider joining an employer-sponsored savings program in which the company deposits a portion of your paycheck directly into a savings account or another savings vehicle.
If you pay yourself first, meaning money is put away so that you never get easy access to it, you are less likely to miss it.
Secondly, how you save your money is important.
If all of your savings are sitting at the neighborhood bank, it's time to make some withdrawals, the CPAs said. Diversify your investments among those that offer long-term growth and security - such as stocks and bonds - and short-term savings vehicles - such as certificates of deposit and money market funds.
Then, there is an emergency fund to consider.
To be prepared for a possible emergency, the general recommendation is to keep an amount equal to at least three months of household expenses in liquid accounts, or those that enable you to withdraw cash quickly and easily without risk of losing the principal. A money market account at a brokerage house or a money deposit account at a bank are examples.
But if you live in a one-income household with children, or if you are older, you should set aside enough cash to cover six to 12 months of living expenses.
Fourth, calculate your total debt.
Generally, the Virginia CPAs said, your monthly installment credit payments should not exceed 20 percent of your monthly take-home pay. This includes auto loans, credit-card debt, installment loans, personal loans and student loans. It does not, however, include first mortgages.
If your debt is close to 20 percent of take-home pay or over that figure, curb your spending and pay off your credit balances. One alternative may be to consolidate your debt by taking out a home-equity loan. That would mean, in most cases, you would pay a lower interest rate on the debt and could deduct the interest you pay on the loan from income taxes.
Next, turn your attention to credit cards.
One way to control your debt is to control or eliminate your use of credit cards. Although credit cards make it easy to purchase items, they are among the most expensive ways to borrow money.
Keep only one or two credit cards and limit your use of them. If you carry over a balance, seek out a card with a low interest rate. Be sure it offers a grace period before interest charges are assessed.
Then take a look at your homeowner's insurance.
Although a home is typically an individual's largest asset, many people don't protect that asset by making sure their homeowner's policy is up to date. If you home has recently been renovated or your property's value has increased, it is especially important to check your coverage.
The CPAs recommend that you ensure you have coverage for 100 percent of the replacement cost of your home. If you have less coverage, you'll have to pick up some of the cost for any damage done to your home.
Next, check on your disability insurance, which is intended to provide income in the event you cannot work. The amount of coverage you need should be based on the number of dependents you have and whether you are the sole earner of income in your household.
For most middle-income earners, 60 to 70 percent of current salary is an appropriate level of disability coverage.
Finally, now that you have finished your 1994 taxes, you should take an advance look at your tax situation for 1995.
Make sure you are having an appropriate amount of taxes withheld from your paycheck. If you consistently receive a big refund when you file your returns, you are making an interest-free loan to the government. You should alter your withholding.
The CPAs point out that, if you have significant income beyond your paycheck, you must pay at least 90 percent of your tax liability in quarterly installments or risk incurring a penalty.
Now is the time, while your tax situation is fresh in your mind, to implement strategies that can help you take advantage of tax deductions and minimize your 1995 tax liability.
by CNB