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Your home value has exploded over the last year, leaving you eligible for a line of credit, should you use it to finance an upcoming remodeling project?
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Spring Cleaning for Your Money 2016
Attention neat freaks and those who want to take more control of their financial lives: the Vernal Equinox, when the sun shines directly on the equator and the length of night and day are nearly equal, kicks off one of my favorite times of the year: spring cleaning for your money! Now that you have waded through a myriad of documents for tax season, it is an ideal time to clean out your files. Here is what you need to know:
Bank statements: Generally speaking, you only need to keep bank statements for one year, BUT if you think that you may be applying for Medicaid, many states require that you show five year’s worth of bank statements. Also, hold onto records that are related to your taxes, business expenses, home improvements, mortgage payments and major purchases for as long as you need them.
Credit card bills: Unless you need to reference something for tax or business purposes, or for proof of purchase for a specific item, you can shred credit card statements after 45 days. Like the bank statements, hang on to those statements that you may need for your taxes, as proof of purchase or for insurance.
Tax returns/supporting documents: Despite being able to amend your tax returns going back three years, the IRS has seven years to audit your returns if the agency suspects you made a mistake and up to six years if you likely underreported your gross income by 25 percent or more. As a result, you need to hold on to your returns and all supporting documents for seven years. If you work with a tax preparer, ask for a copy of your return on CD—it will save some space in your file cabinets.
Medical Records: Given how hard it is to deal with health insurance companies, you should keep medical records for at least a year, though some suggest keeping records for five years from the time treatment for the symptoms ended. Retain information about prescription information, specific medical histories, health insurance information and contact information for your physician.
Utility and phone bills: Shred them after you have paid them, unless they contain tax-deductible expenses.
Taxes: If you received a tax refund of more than $1,000, your first task is to adjust your withholding. Remember, a refund is the return of a year long, interest-free loan that you extended to Uncle Sam, so let’s not do that again! If you need help determining the proper withholding amount, the IRS has a nifty calculator: http://apps.irs.gov/app/withholdingcalculator/.
Once you adjust, you will have more money in each paycheck. It is critical that you capture this extra amount and save it. The easiest way to do so is to boost your retirement contributions into your employer-sponsored plan or to establish an automatic monthly draft from your checking or savings accounts into a traditional or Roth IRA.
Home Maintenance: Make sure that your property/casualty insurance is up to date and make a list of maintenance items that you need to address, especially those that may have occurred as a result of winter conditions.
If you are ready to tackle some larger projects, prioritize them by choosing those that add the most value to your home. According to Remodeling Magazine’s 2016 Cost vs. Value Report, “many of the biggest percentage gains were for higher-dollar ‘upscale’ projects.” Don’t fret if you don’t have big bucks available, because the report also found that replacement jobs—such as door, window, and siding projects—generated a higher return than remodeling projects.
Spring Cleaning for Your Money
The much-anticipated beginning of spring comes amid the heart of tax season, which makes now a great time to conduct spring cleaning for your money! So get out your broom and your supplies, because we're going to cover a lot of ground! Taxes: If you received a tax refund of more than $1,000, your first task is to adjust your withholding. Remember, a refund is the return of a year long, interest-free loan that you extended to Uncle Sam, so let’s not do that again! If you need help determining the proper withholding amount, the IRS has a nifty calculator: http://apps.irs.gov/app/withholdingcalculator/.
Once you adjust, you will have more money in each paycheck. It is critical that you capture this extra amount and save it. The easiest way to do so is to boost your retirement contributions into your employer-sponsored plan or to establish an automatic monthly draft from your checking or savings account into a traditional or Roth IRA.
Investments: Something else you may have discovered in the process of preparing your returns is the tax inefficiency of many mutual funds. If you own funds in taxable accounts, you are whacked with two types of taxable distributions: ordinary dividends and capital gains distributions. To minimize the effect of the later, you may want to examine your fund’s turnover ratio, which measures how much the fund manager buys and sells assets in the portfolio. A 100 percent turnover means the portfolio is changed completely in one year. The higher the turnover, the more taxes that you will pay. Another way to minimize taxes—and actually pay lower fees—is to stick to low cost index funds.
As we approach the end of the quarter, don’t forget to rebalance your accounts so that your allocation remains in check. This requires that you override your emotional urge to keep winners and dump losers. But that’s the point of asset allocation—the various funds are supposed to move in different directions at different points in the economic cycle. If your retirement plan allows, elect auto-rebalancing so you don’t have to worry about doing it manually. Otherwise, put a reminder in your calendar for June 30, September 30 and December 30.
Identity Theft Protection: Time to change those passwords; install firewalls and virus-detection software; shred unwanted financial documents; store personal information in a safe place; and review your credit report at annualcreditreport.com.
Real Estate: The spring real estate season is a good reminder that you need to take care of one of your most valuable assets: your home. Make sure that your property/casualty insurance is up to date and then start making the list of maintenance items that you need to address, especially those that may have occurred as a result of winter conditions.
If you are ready to tackle some larger projects, prioritize them by choosing those that add the most value to your home. According to Remodeling Magazine’s 2015 Cost vs. Value Report, “replacement jobs—such as door, window, and siding projects—generated a higher return than remodeling projects.” The good news is that simple and lower-cost projects can provide you with a big bang for your buck.
Finally, with conventional mortgage rates at relatively low levels, new, lower pricing on FHA loans, and home prices continuing to advance, it may be a good time to determine whether or not a refinance of your existing mortgage makes sense.
According to Mike Raimi of Luxury Mortgage Corp, if you are looking for a 30-year conventional mortgage with 20 percent down, the best rates are available for those with credit scores above 740. For every 20-point drop in score, the mortgage rate jumps by a quarter of a percent. If your credit score is below 620, it’s tough to get a loan closed. (Credit scores do not have nearly as much impact on loans of 15 years and shorter.)