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New Year Financial Health Checklist

Jake Akoury, MBA, Financial Advisor, American Express Financial Advisors, Inc.

If you are like most Americans, one of your New Year's resolutions may have been to get in better financial shape. Whether your goals include reducing debt, saving for education or planning for retirement, you can use the overview and checklist below to help you organize your annual financial fitness exam.

. Know what you want.

Have a clear, concise financial goal for the year, rather than a general intention. For example, don't just expect that you can pay down your credit card and end up with more money in the bank. Instead, set a specific goal and create a timeframe to achieve it, such as having the balance on your credit cards paid down to $0 by midyear and accumulating more than $10,000 in an emergency fund by year end.

. Know how much debt is too much.

Your total monthly long-term debt payments, including your mortgage, credit card payments and loan payments, should not exceed approximately 35% of your gross monthly income. Prioritize your debts by making a list and organizing them by their annual interest rate. The highest rate (most likely credit card debt) should be paid off first, while you make minimum payments on your other bills. Allocate a fixed amount each month to the task and have it withdrawn automatically from your checking account if possible.

. Calculate how much you should save.

Your savings need to tie directly to your lifestyle, long- and short-term goals, and the reality of how early you have started to save and/or accumulate debt. If you are under 40 years old, generally a good rule of thumb is to max out your retirement plans, such as your 401(k) or IRA. Then try to save at least 10% of your take-home pay for emergency funds and other goals, such as buying a new home or college education for your children. If you are over 40 and are just starting to save, you may consider bumping up your savings to 25% or more of your take-home pay.

. Know how much you will need when you retire.

Most people will need approximately 80% to 100% of their current annual income while in retirement. Although you will no longer need to save money while in retirement, you will have higher health care expenses and may even increase your expenses for things such as travel. A simple calculator from the National Retirement Planning Week is available at www.retireonyourterms.org.

As a ballpark estimate, your total nest egg should be roughly 20 times the annual expenses you will have that won't be covered by pension or Social Security payments. That should enable you to withdraw approximately 5% of your savings each year without tapping into much of your principal. For example, if you think you will need the inflation-adjusted equivalent of $50,000 per year, you will need the equivalent of an inflation-adjusted $1 million nest egg.

. Spend wisely, especially when making large purchases.

Set a budget that is realistic in the short term, fits into your long-term plan and doesn't take you off track from your retirement goals. With large purchases, such as a home or a car, follow some simple guidelines. If you are buying a home, generally it shouldn't cost more than two and a half times your gross income. You should also keep an eye on the rest of your budget when considering your monthly payment, terms of loan and total cost of owning a car. It is generally not prudent to spend more than 8% of your monthly gross income on car payments. (The average consumer pays 11% monthly.)

. Get proper insurance.

According to the American Association of Health Plans, there are more than 40 million uninsured and millions more underinsured Americans. Life insurance is one of the most important and often overlooked policies.

Life insurance can be quite complicated, but if you are married with children, depending on your family's expenses and how much your surviving spouse can earn, you need a policy that covers six to 10 times the family income and possibly more. To calculate exactly what you should get, you must factor in the length and size of your mortgage and other debts, how old your kids are, whether you intend to put them through college and other details specific to your situation.

. Seek professional help.

There is no better time than now to consult a qualified financial advisor for personalized assistance in getting financially fit for the New Year.

This information is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. The views expressed may not be suitable for every situation. American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer.

(Jake Akoury can be reached at 617-242-1500 x289. )

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Jake Akoury

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