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Laura Rowley Money & Happiness

Laura Rowley, Money & Happiness

Six Steps for Financial Spring Cleaning

by Laura Rowley

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Posted on Tuesday, March 20, 2007, 12:00AM

When I was a kid, the first weekend of spring was typically spent shopping for white Easter shoes and an appropriate spring coat. (I remember a particularly fabulous pastel plaid cape with a white faux-fur collar when I was about eight.)

In recent years, my rites of spring have involved a similar shopping excursion for my kids; blowing dead leaves out of the bushes; and the ritual changeover from winter to spring clothing -- a daylong bacchanal of laundry and storage that's about as much fun as doing taxes.

Happy Financial New Year

If April 17 marks the official end of fiscal year 2006, then April 18 is a kind of financial New Year's. As you celebrate the arrival of spring, consider a financial spring cleaning to put yourself on solid ground for a new fiscal year. Six ideas to consider:

1. Calculate your net worth.

Net worth is a strong barometer of your overall financial progress. Revisit your personal balance sheet to see where you stand, and help refine money goals for the coming year.

First, total the sum of your assets -- cash, checking and savings accounts, stocks, bonds, mutual funds, retirement savings, life insurance policies that have accumulated cash value, and so on. Add to this the value of your personal property, including your house, investment real estate, car and other possessions. (Imagine you've decided to sail around the world and sell everything you own on eBay.)

Next, determine your liabilities: Credit card debt, student or auto loans, mortgage -- any money that you owe. Now subtract the latter from the former: That's your net worth.

This simple spring check-up provides an early-warning system. For instance, a negative or declining net worth should make you consider whether you've taken on more debt than you can handle.

Obviously, your net worth should increase by a greater annual percentage in your younger years versus your 40s or 50s. For instance, say your net worth is $1,000 at age 20. You could easily grow it 40 percent in a year ($400) as you save and pay down debt. By contrast, if your net worth is $100,000 at age 40, to grow it 40 percent ($40,000) is a much tougher climb.

One formula suggests you multiply your age by your pre-tax household income and divide by 10. So, if you're 35 years old and earn $80,000 annually, your net worth should be 35 x 80,000 ÷ 10, or $280,000. But that's just a rule of thumb. (Consider the 35-year-old heart surgeon or lawyer with a bright earning future but a mountain of student loan debt.)

The Federal Reserve's most recent Survey of Consumer Finances found that median net worth rose 1.5 percent to $93,100 from 2001 to 2004. To compare yourself to others in your income or age group, see this Federal Reserve Bulletin.

2. Order your credit report.

An estimated 80 percent of consumers have at least some negative information on their credit reports, and one in four reports contain errors significant enough to cause consumers to be denied credit, a loan, an apartment, a mortgage, or even a job, according to a study by the Massachusetts Public Interest Research Group.

Under the Fair and Accurate Credit Transactions Act passed by Congress in 2003, consumers can order their free credit report from all three major bureaus to check for mistakes. You can request the reports by visiting AnnualCreditReport.com www.annualcreditreport.com; by calling (877) 322-8228; or by sending a written request to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

Although you'll receive a free report, you still have to pay a fee to get your actual credit score. Be sure to obtain these reports directly from the bureaus; don't provide personal information to any third parties who offer to get free reports for you. (You need to give the bureau your name, address, date of birth, and Social Security number to retrieve the report.) Any inaccuracies should be disputed in writing with the credit bureau immediately.

3. Adjust your withholding.

The average refund among taxpayers who have already filed their 2006 tax return is $2,578, according to the Internal Revenue Service. Lots of people celebrate when their tax return yields a big check. But it should really be taken as a sign of poor planning: Instead of earning interest on that money during the year, you gave Uncle Sam an interest-free loan.

It may be time to adjust your withholding -- the amount of money taken out of your paycheck during the year. To change your withholding, ask your employer for a new W-4 form. The reason many people get large refunds is that they don't bother to fill out the complicated worksheet on page 2 of the W-4 form. This is where you can list your mortgage interest and real estate taxes, entitling you to more personal allowances.

Similarly, to avoid a big bill next April, ask that an additional amount be taken from your paycheck. Simply take the amount you paid the IRS and divide it by the number of pay periods in the rest of this year. (Another option is to reduce the number of personal allowances on your W-4.) For more help with your W-4, check out the IRS's withholding allowance calculator.

4. Review your tax return with your spouse.

Whether you, your spouse, or your accountant is the financial guru in your life, take the opportunity after you file your taxes to go through your return together. Make sure both of you understand all of the assets in your marriage.

Both partners should maintain a careful record of the names of financial institutions and account numbers in the event of an untimely death. This is also a great time to brainstorm and collaborate on a plan to build your net worth and move closer to your financial goals.

5. Beef up your insurance records.

As you do your spring cleaning, take along your video or digital camera and document each room for insurance purposes. Create a master list of what you own and store the tape or photos at work, at a relative's home, or in a safety deposit box. Check your homeowner's policy and make sure it covers "replacement value," not "actual value," of your home, so you have enough money to rebuild if the worst happens.

6. Start planning your summer vacation.

Employed adults in the U.S. receive 14 days of vacation on average -- but a full one-third of workers don't take all of their time, according to a 2006 survey by travel web site Expedia.com. Employees leave an average of four days on the table -- a collective sacrifice of 574 million vacation days and $75 billion in pay.

The most cited reason for not taking the time off? Having to schedule the vacation time in advance, the survey found.

Do your health, relationships, and productivity a favor and invest an hour this week planning a summer holiday -- the most popular season for travelers, according to the Travel Industry Association.

Open an online savings account to pay for the trip. According to the Bureau of Labor Statistics, families spend an average of about $2,850 on vacations. Online savings accounts, linked to your existing checking account, are an ideal way to set aside the funds so you don't put your August getaway on a credit card. If you open an online account this week with $100 and throw in an additional $50 a week until August 1, you'll have saved about $1,000 toward the trip.

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88 Comments

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  • JasonS - Friday, April 13, 2007, 9:06AM ET  Report Abuse

    • Overall: 3/5

    I'm a 23 year old financial analyst making about $50K/year and according to the rule of thumb formula, I should have a net worth of about $110K. I have about 20% of that...is this formula somehow setup to be more accurate with an increase in age?

  • Yahoo! Finance User - Wednesday, March 28, 2007, 9:41PM ET  Report Abuse

    • Overall: 3/5

    The article has useful information to serve more like a wake up call for people to think about their savings. However, I was shocked by the quick net worth calculation. My household income is $364,000 and am 33 years old. This means that I should have a net worth of $1.2 million. That is crazy! I save 20% of my gross pay each year, invest it all (don't stuff my money under the mattress) in taxable accounts, 401(k), IRA, etc., but am not at the $1.2 million (am at half) and have no debt except mortgage. I think the net worth calculation does not apply to everyone and it is not a good tool to use in the article. As stated by others here, a great deal of people are living paycheck to paycheck and here the article is stating how important it is to save - and then at the same time - the article is using this crazy calculation to make everyone feel really bad about their financial situation. The main point should be to give advice on how to get to a positive net worth and get out of the living paycheck to paycheck rut.

  • Yahoo! Finance User - Tuesday, March 27, 2007, 5:29PM ET  Report Abuse

    • Overall: 4/5

    I've always felt that schools of all stripes should have a mandatory semester or two of personal finance, covering tax policies, insurance, investing, mortgages etc. Reading some of these comments confirms that belief quickly

  • phenomena - Monday, March 26, 2007, 3:18PM ET  Report Abuse

    • Overall: 4/5

    Laura is on the money! I have just requested my free annual credit reports and all three have errors. I am so glad that I have caught them five months prior to relocating because it affords me time to correct these errors.

  • US - Sunday, March 25, 2007, 11:41AM ET  Report Abuse

    • Overall: 4/5

    Very infirmative and worth spending the time.

  • Dusti - Sunday, March 25, 2007, 11:18AM ET  Report Abuse

    • Overall: 3/5

    This offers some sound advice. I particluarly liked the advice about vacation time and saving for it. My family has been going through the steps of Dave Ramsey's Financial Peace where much of this information is also given. I've never had so much peace in my financial life as I have now.

  • GoodGrief - Sunday, March 25, 2007, 11:11AM ET  Report Abuse

    • Overall: 4/5

    Great article. Maybe you can write an article for those people who responded that they are living from pay check to pay check. They need to change their views on their financial situation and find ways to save. It's a must in today's market.

  • maria m - Sunday, March 25, 2007, 11:10AM ET  Report Abuse

    • Overall: 4/5

    great info!

  • Storm trooper - Sunday, March 25, 2007, 10:32AM ET  Report Abuse

    • Overall: 1/5

    Maybe it's just me, this was a very basic plan. My guess is most people reading this will be so far below the rule of thumb net worth #. and would have no idea on how to address that. especially from this article. 401k enrollment is very important. Contribute what your employer matches. That is a ez 100% gain on your money. Create a budget so that you can achieve the American dream and own a home. If you own a home consolidate your debts and toss those credit cards in a drawer. Buy a cookbook. allot cheaper than eating out. Cancel services that you do not use anymore. object is to save $$. lawn service? cheaper to buy a lwn mower and do it urself. health club? walk around the neighborhood instead. Premium ch's on cable, extra phone services. get rid of them. With the money you save, even if it is as little as 100 per month. Open a Vanguard investment account. And have $100 per month deducted from your checking account each month. 20 years later at 8% tha account would grow to over 50k. Now that is something to clean up for.

  • Dorispal - Sunday, March 25, 2007, 10:27AM ET  Report Abuse

    • Overall: 4/5

    you should added a link for opening an online holiday savings account, but the article overall was very helpful

  • Debtbuster - Sunday, March 25, 2007, 10:26AM ET  Report Abuse

    • Overall: 1/5

    Are you kidding me?!? There is no such thing as spring cleaning your finances. If you were running a business you would me monitoring your finances daily. If not you are out of business. Your personal finances should be done weekly, preferable with software on a computer so that you can see where all your money is going and budget accordingly. If not you will be out of business. The best advice to give is to live within your means, rent if you cannot afford to buy since a home is a money pit, NOT an investment, and always carry the right amount of ins for your medical, car and home/renters. Disability ins for yourself is also a must. You have to have a way to replace your income if you are disabled. And if you are in debt you are not going on vacation until you pay down those credit cards where you could be paying 20% in interest. And my personal favorite, make sure you have 6 months of cash in the bank as a personal emergency fund. This is so NOT true! If you have debt you better pay down that debt with the emergency fund. That will save you 20% in interest charges and then you can build up that emergency fund again. Until you do you can always access those credit lines that are paid down as emergency funds. But do not fall into the trap of using those cards again because they are paid.

  • kerry - Sunday, March 25, 2007, 10:26AM ET  Report Abuse

    • Overall: 2/5

    i will echo what jralphpike said. most of these financial advisers don't live in the real world. we are not living paycheck to paycheck but we sure did for many years so we know how hard it is to save and pay down debt. just saying" pay down debt" is not good enough. I tell co-workers all the time to save now while you are young but it's not always that easy. i believe you need to be more speciffic in your financial advice.

  • __A_YAHOO_USER__ - Sunday, March 25, 2007, 10:25AM ET  Report Abuse

    • Overall: 3/5

    Most people with positive net worth of any amount have had parents who were either rich or understood how money works. Most people have had neither. Just recently I've pulled myself up to a positive net worth but I still fall short of the $280,000 that is supposed to be average for my age and income. I'm not the only one! This is a good article to get people thinking about saving and getting out of debt but is way beyond what most people are actually able to do. I bet most people have net worths of MINUS $280,000. Just because people are driving nice cars and live in nice houses is no indication that they are well off. Most of them can hardly pay the interest on what they own..."in debt up to their eye balls" as the popular commercial states. Compared to that, I'm quite happy with my small apartment and my debt free status with a net worth of only a couple thousand but on the positive end of the spectrum anyway. I've gotten "positive" by refusing to lust after things that I don't have and not being tempted by advertising..."if you call in the next 8 minutes....but wait!! A savings of POSITIVE $280,000 may be slightly out of reach for me but I'm plodding along...at least not paying interest!

  • Mayra - Sunday, March 25, 2007, 10:23AM ET  Report Abuse

    • Overall: 4/5

    States real goals and gives easy to use solutions. I liked it

  • BarbaraM - Sunday, March 25, 2007, 10:17AM ET  Report Abuse

    • Overall: 5/5

    ....and remember to contribute to your employer's 401(k) or open a Roth IRA. You won't miss the money in the long run and you'll be amazed at how that money will grow over the years. One step at a time. You will be so glad you did when retirement comes.

  • Mike - Sunday, March 25, 2007, 10:16AM ET  Report Abuse

    • Overall: 4/5

    Excellent Article Laura!, I'm amazed at the people who gave it a low rating. and at the same time complained about their own situation. Your financial house is what you make it. Complaints about living pay check to pay check, banking errors and everything else under the sun is an excuse for your own financial short comings. If your living check to check REDUCE your expenses where you can save money. If your less than 30 you need to be saving 25% of your income less than 40 - 33% under 40-50 - 50% of your income should be in savings. STOP sitting around waiting for the government to take care of you, get some financial education and be responsible for yourself. Retiring on social security will SUCK !!

  • M. AkhterH - Sunday, March 25, 2007, 10:03AM ET  Report Abuse

    • Overall: 5/5

    Excellent reminder.

  • j - Sunday, March 25, 2007, 9:57AM ET  Report Abuse

    • Overall: 2/5

    About adjusting withholdings. Most of the people I know are living paycheck to paycheck and have a hard time saving money. So changing their withholdings so that they have more money to save is not a good idea, because they will spend it. How much interest are we talking about anyway 2 or 3%. So, for them it is better to have extra money taken out so that they have some "savings", although it is not drawing interest, at least they have a savings. I wonder, do you (Laura) ever consider the fact that your generic advice is really for people that already have a little money and does not help the poor person much?

  • Yahoo! Finance User - Sunday, March 25, 2007, 9:56AM ET  Report Abuse

    • Overall: 5/5

    never buy anything until you can pay for it in cash---one exception in a home. paying interest keeps you poor and the bank rich.

  • decatur - Sunday, March 25, 2007, 9:51AM ET  Report Abuse

    • Overall: 1/5

    I would not call these 6 steps exactly "spring cleaning" but rather "4 steps to review finances for those with positive net worth". Insurance does not really fit here, best time to evaluate your policies is around the renewal time, and it's not spring for everyone. Planning summer vacations it clearly out of line here. Could you write an article "Practical steps to handle your finances if you are poor" or "ar the late fees fair", or "the best way to handle poor customer service - when a costly mistake was done by the bank (phone company, etc.)" please?

  • Tom - Sunday, March 25, 2007, 9:49AM ET  Report Abuse

    • Overall: 1/5

    This article brings nothing new at all. Everyone knows how to accumulate wealth. Pay off your debt...build up savings for a "rainy day"...invest. Now comes the government with out of control spending!!! Hundreds of Billions for wars we can't win. Advertising has us so brainwashed that we are buying cars we can't afford, and the employment situation has us working in dead end jobs that we can't leave so we can buy things we don't want!! Everyone is always out to get their own money by screwing others...it is almost a national past time to get rich off of your neighbor, while he goes to the poor house. Instead of wasting time by printing articles like this by some no name who thinks that the key to money management is to schedule time for a vacation (whatever!!!) why don't we inculcate basic money management into our school systems. The kids don't care about math or history, but they do care about money and their future. As long as this class isn't regulated by the government!!!!

  • michael - Sunday, March 25, 2007, 9:48AM ET  Report Abuse

    • Overall: 3/5

    should have mentioned not leaving large amounts of money in low interest bank accounts. money market check writeing is an option.

  • J - Sunday, March 25, 2007, 9:47AM ET  Report Abuse

    • Overall: 5/5

    The is just this "a step by step" start to increasing financial responsibility. A good primer. Anyone who thinks that they are not responsible for their financial future (as I did read a few responses) should move to a socialist country. This is a capitalist country.

  • Yahoo! Finance User - Sunday, March 25, 2007, 9:46AM ET  Report Abuse

    • Overall: 1/5

    There is nothing here to help the blue collar worker who is trying to get out of debt. This report on cleaning house on finanaces is not for the low to middle class who don't even think about summer vacations. How many people in this country trade in their vacations for that extra check to pay the bills! Get down to earth and write something that will help everyone!

  • Jenny - Sunday, March 25, 2007, 9:43AM ET  Report Abuse

    • Overall: 1/5

    Silly article that doesn't give you anything new. How about advice on how to really cut expenses? The average American is staggering under credit card debt - and this article advises you to plan for a vacation you may not be able to afford. How about an article on how to live without cable? A pay as-you-go cell phone? I'd like to see that.

  • Yahoo! Finance User - Sunday, March 25, 2007, 9:43AM ET  Report Abuse

    • Overall: 2/5

    nothing much useful here. Most people are in debt over their heads and who needs to be told that this is not good. Figuring my net worth just depresses me and makes me realize just how in debt I am though living paycheck to paycheck is not going to help me get out of debt. This woman just doesn't get it. The average working man doesn't care about what she just said, they just want help getting their heads above water so that they can take a family vacation without feeling guilty for putting some of it on the good ole charge card. This article was pointless.

  • ADORA - Sunday, March 25, 2007, 9:40AM ET  Report Abuse

    • Overall: 1/5

    Intro was as outdated as the tips.

  • Gregory - Sunday, March 25, 2007, 9:37AM ET  Report Abuse

    • Overall: 1/5

    The most interesting information in this article is that the net median worth rose 1.5% in 3 years. What was the inflation rate? Does it mean that the net worth actually fell? It sure feels like this. What about the value of dollar? How much it fell in those years? We are getting poorer, and these articles are designed just to make us feel good.

  • yahoo user - Sunday, March 25, 2007, 9:35AM ET  Report Abuse

    • Overall: 4/5

    A broad coverage of fairly easy to accomplish money issues. The simple things are the easiest things for a fairly lazy American family to do to help make their situation just a little better than last year.

  • Yahoo! Finance User - Sunday, March 25, 2007, 9:33AM ET  Report Abuse

    • Overall: 2/5

    I too am tired of the same old articles... The truth is they provide no new insight at all. For the people who can do this, already are. For those that can't, this article is useless. To sum up the financial problems of this country in one article, is like to trying to sumarize brain surgery in Cliff Notes. Corporate America, and the governement want consumers to spend, not save. The credit card companies want the public in debt. The consumer is bombarded by credit card offers, new car ads, new furniture ads, and all the things they MUST have. It SHOULD not be the responbility of the average citizen to prepare for his future - not in this, the most wealthy of nations. I've seen my 401K go up and dwindle to nothing. Meanwhile managers of my 401K make MILLIONS in small fees collected for every trade. I cannot realistically count on my 401K for retirement I will be working until I die, and heaven help me if I get sick, I won't be able to afford it. Health insurance is ridiculous. No alternative fuels exist, petroleum products are SKYROCKETYING ($4.75 a gallon for propane to heat my house in the North East). You can follow this article to a "T" and you would still be [blanked] in the end because the consumer just does not control these things. GET REAL!

Showing comments 6-35 of 88<< PreviousNext >>
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