Print

Email story

Comment

Email editor

On money

Use tax season as opportunity for financial checkup

By HELEN HUNTLEY
Published January 23, 2005

Income tax season isn't just about settling up with the IRS. It's also a golden opportunity for a financial checkup. Once you've assembled year-end statements for all your accounts, you've already done half the work.

Here are five important questions those statements can help you answer:

* How much is my net worth? Add up all your assets (such as bank accounts, investment accounts, savings bonds, home value) and subtract your debts (mortgage, credit cards, car loans, etc.) Net worth is the single best indicator of your financial health because it takes into account what you own and what you owe. Do this exercise every year and you can tell whether you are getting richer or poorer.

* Do I have enough in my emergency fund? Financial planners recommend keeping enough readily accessible funds to pay three to six months of living expenses in case you lose your job or face a dire emergency. You can include bank accounts, money-market funds, short-term CDs and savings bonds you've held at least a year.

* Are my long-term investments allocated the way I want them to be? The best allocation among stocks, bonds and cash depends on your age and your risk tolerance. For example, a 60-40 split between stocks and bonds would be fairly typical for a conservative middle-age investor, while an aggressive 25-year-old might opt for 90 to 100 percent stocks. If you find your portfolio percentages are out of whack, either move money or direct your new contributions to the category that came in underweight. Larger portfolios should have allocations within each category, such as small stocks and foreign stocks, which also should be adjusted periodically.

* Am I saving enough for retirement? If you've already got a financial plan, check your progress against it. If you don't have one, you can get a sense of whether you are headed in the right direction by using one of the many retirement planning calculators on the Internet. See www.choosetosave.org)

* Is my debt burden manageable? Debt payments (including mortgage) of 40 percent or more of your pre-tax income are a pretty reliable indicator of financial distress, but even lower percentages can be unmanageable. If your credit card debt has grown since last year, that's a sign you may be living beyond your means. If you are making only minimum payments or have been late with any payments, some drastic lifestyle changes may be in order.

I purchased some stock years ago and left it in my company's dividend reinvestment program. The stock split several times and I have accumulated additional shares through dividends. I sold 100 shares recently. How do I determine my cost for tax purposes?

I hope you have records that show what you paid for the stock and the amount of your reinvested dividends. If you do, add those numbers up and divide the total by the number of shares you owned before the sale. That's your cost per share. Multiply that by the number of shares you sold. Your capital gain is the difference between your cost and the proceeds from the sale.

If you do not have records, make a good faith effort to reconstruct your cost basis. The alternative is to pay taxes on the full amount of the sale.

Once you have gone through this exercise, note in your records the cost basis you used for this transaction. It must be subtracted from the total cost of your investment when you sell future shares.

I receive a lot of invitations to free meals and seminars at restaurants or hotels from people I don't know. They try to tie in health matters with personal finances, wills, powers of attorney, etc. Obviously most of the letters are intended to gather information about people's finances, which are better not discussed with strangers. Why are unsuspecting people not being warned to avoid these invitations, which usually have no return address?

You just warned them. If you don't know the sponsoring organization or you get an uncomfortable feeling about an invitation, don't go.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified August 31, 2005, 11:06:32]