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10 Smart Money Tips for 2012

Philip Moeller

We've already become savvier consumers and cut back on spending. So, if there's a dominant consumer theme in 2012, it will be to look for small savings, particularly in charges and fees that are often hidden. Transparency should be your friend. Here's a checklist of 10 things you should do to make better use of your money.

[See 10 Steps to Fine-Tune Your Retirement Plan.]

Know what you spend. Do you really know where your money goes? Spending patterns often can get hardwired into our behavior. Vendors like it that way because it's easier for them when you just fork over the money every month without thinking about it. But you should be thinking about how your money is spent and, in particular, where you can spend less of it.

Make a budget. When you actually know how much you spend, it is much easier to make a budget. Budgets are an essential discipline if you are serious about being a master of your money.

Stick to your budget. Every month, review the prior month's spending and compare it to your budget. After a few months, this will cease being torture and can become an effective planning and support tool.

Have some money fun. If budgeting is all drudgery, you will wind up in a money prison and that's a bad place to be. So, set aside money to have some good times. Building in such rewards can provide the incentive to stick with your budget.

[See How to Prepare for a Deflationary World.]

Check vendor, credit card, and banking fees. Look carefully for new fees and interest charges. Financial companies are always looking for ways to pick up more consumer revenue. Make sure it's not at your expense. Consider using online tools to automate monthly bill payments, particularly for utilities and other "must pay" accounts. If you have a credit card that offers rebates on purchases, see if you can use it to pay other vendors' bills. Before doing so, make sure the vendor doesn't slap you with its own fee for paying with a credit card.

Review insurance terms and rates. In many households, insurance is a large percentage of spending. As we, and our possessions, get older, our insurance needs might change. Is the deductible on your auto's collision coverage still the right call as your vehicle's value declines? Is your home insurance providing you more protection than you need given declining property values? Do you still need as much life insurance or is it time to use those premium dollars for another purpose? Even if your insurance coverage is perfectly aligned with your needs, you should shop for better rates at least once a year. The carrier that provided you the best deal 10 years ago may no longer be the best choice.

Review retirement accounts. Make sure you regularly rebalance your retirement investments. Over time, winners and losers will throw your portfolio out of balance. Consider selling some winners and buying in sectors that haven't done so well. This should be at least an annual exercise. As you get older, think about preparing your holdings for the time when you will be withdrawing funds. That means moving from growth into income funds and thinking about taxes on withdrawals.

[See What to do About Retiree Healthcare Costs.]

Look at investment fees. New government rules will soon require consumer-friendly fee disclosures from investment firms. Saving even a few tenths of a percentage point on management fees can add thousands of dollars to your retirement funds in the long run.

Consider a Roth IRA conversion. Regular IRAs let you contribute pretax dollars and defer taxes on any investment gains until you withdraw the funds. You can begin doing so at the age of 59, but you must withdraw what is called an annual required minimum distribution (RMD) of funds from these accounts beginning when you turn 70 1/2. Roths, by contrast, are funded with post-tax dollars, but there are no taxes on any investment gains and no age requirement for withdrawing funds. Roths offer a particularly attractive way to pass on wealth to your heirs. That's because you can transfer a Roth when you die and your heirs avoid all taxes (although they will be subject to the same RMD rules that apply to regular IRAs). The big downside of conversions is that you must pay income taxes on funds moved from tax-deferred accounts. Most major investment websites have conversion guides.

Review your Social Security benefits. If you haven't yet begun taking Social Security, do you have a plan for when you will start? Benefits can be taken as soon as you turn 62. But for each year thereafter until the age of 70, your benefit rises 8 percent plus the level of inflation. With lifespans getting longer and longer, boosting your level of lifetime guaranteed Social Security benefits may be a terrific "investment" decision. Check it out.

Twitter: @PhilMoeller

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