Financial Peace of Mind: You Have the Power

I ended last year by challenging four people to change their financial lives in 2007. In the Color of Money Challenge, two single women and one couple will work with me to get rid of debt and save for their futures.

So far so good. The challengers are already implementing many of my recommendations. Check out my column this Sunday to find out how they are doing two weeks into the new year.

I also asked subscribers to this e-letter to tell me about their financial New Year Resolutions. Here's what I received:

Carla Jenkins of Arlington, Va., wrote: "My 2007 financial resolutions are: 1) paying off my credit card debt, 2) maximizing my 401 (k), and 3) opening a mutual fund. Already I have enrolled in the Consumer Credit Counseling Debt Repayment Plan for the fourth month and will pay off my first account by June and the remaining two by May 2008. Currently, I am educating myself about the mutual fund industry by reading books, newspapers and conducting informational interviews. Accomplishing these objectives will help me achieve debt-free living, a positive net worth, and a solid retirement."

Getting rid of debt is also a major goal for Janet L. Hedrick, also of Arlington: "I am going to take the advice from the tips from Money Management International and will do the following:

1) Track all expenses for the rest of January to determine where I'm spending my money and where changes can be made. (I am probably spending too much on clothes and on eating out.)

2) Develop a budget by February 1.

3) Eliminate my credit card debt by December 31, 2007.

4) Determine specific ways to change spending habits to reduce expenses.

5) Determine a savings plan.

6) Postpone any vacations and extravagant purchases until debts are paid.

7) Use any bonus money from work and proceeds from book sales to pay off debt.

8) Monitor progress monthly."

(Click here for more tips and tools from Money Management International.)

Palmer Payne of Boothbay Harbor, Me., says his plans are to "review my mutual fund portfolio at the end of each quarter to make sure that my mix and allocation is in proper proportions. I vow to do this in the final week of each quarter and not put it off."

Mardiko S. Ellison of Washington, D.C., is very specific: "I have two loans that total about $2,000 and no emergency savings. I will pay the loans. Once the loans are paid, I'll use those funds to start emergency savings of at least $3,000. I plan to accomplish this by July 2007."

Lauren Williams from Austin, Texas, wrote: "I just got the e-mail with your updated column and I'm so excited to see that you are doing this new series. I am going to try to keep up with that this year. I want to pay down my credit card debt, build a savings account, and work towards purchasing a house by December of 2007. I am one of those individuals who understands what to do but struggle with the discipline of doing it. I'm a young African American woman with a master's degree, no children, no husband but sadly -- no assets. Luckily, I don't have the challenges most people my age have (job insecurity, single mothers, uneducated, etc). I feel as if I have a good setup, I just need to improve and make it better. Hopefully, this time next year, I can e-mail you and let you know that things are different."

As you set your own financial resolutions, keep me posted on your progress. I'll include your comments in the e-letter and post some on washingtonpost.com. Send your New Year's Resolution Progress Reports to colorofmoney@washpost.com.

A Return to Retirement

Clearly, saving for retirement is important. But what's not clear for many employees is how they should allocate their retirement money.

Martha M. Hamilton tackles this quandary in her latest Financial Futures column. While many employees know that they should participate in their workplace retirement plan, many are not properly investing the money.

It comes as no surprise to me that investments made by employers in the traditional pension plans they oversee outperform investments chosen by participants in defined-contribution plans, i.e. 401(k) plans and the like. As Hamilton reports, it's by 2 to 4 percent each year, according to Scarlett Ungurean, a principal with Mercer Investment Consulting.

Recent changes in federal law may be able to help employees. Read more: "The New Work Perk: A Little Advice for Investors" (Jan. 7).

Hamilton also hosted an online chat earlier this week with Barbara Fallon-Walsh and Nancy Philleo of Vanguard to discuss retirement planning Here's an excerpt:

Q: I would like to know what resources are available (hopefully locally) to review a household retirement plan for my wife and I? I would like a second opinion on my plan and its assumptions prior to actually committing to retiring this coming March at age 55.

Hamilton: There are a few Web sites where you can find the names of planners in your area. Try www.napfa.org or fpanet.org. And there is good advice about questions to ask financial planners at http://www.sec.gov/investor/brokers.htm.

Q: Is it better to start saving for retirement while paying down high-interest credit card and personal debt, or is it better to first pay off all of the debt before one begins to save for retirement?

Martha M. Hamilton: I'll let the experts follow up, but my instinct would be to do both, perhaps putting more money toward paying off the debt initially. And once the debt is paid off, increase the amount of savings for retirement by what you have been spending on debt repayment.

Barbara Fallon-Walsh: We concur! With a good strategy in place to pay down debt, it seldom makes sense to defer retirement savings because of the value of compounding. Perhaps consider increasing your retirement savings by 1-2 percent per year, tied to the timing of your annual merit increases.

Q: If one has maxed out his or her 401 (k), cannot contribute to a Roth IRA, should the next step in retirement savings be to invest in taxable mutual funds or make a non-deductible contribution to a traditional IRA?

Barbara Fallon-Walsh: Couple of options: Does your employer offer a Roth 401(k) option? You give up current deductions, but get tax diversification, tax avoidance on the gains in your plan. Second, balances in a traditional IRA can be converted to a Roth IRA regardless of income in 2010 (I think that's the date). So, today's contribution would offer a Roth option even if you don't get it today. Finally, there are tax efficient options among taxable mutual funds that you might consider.

Read more from the transcript.

I've also written a few columns on retirement savings plans and investment strategies within the last year:

* "Revisions to Savings Rules Proposed" (Sept. 28)

* "Compound Wisdom" (Apr. 9)

* "The Race Savings Gap" (July 16)

What's Fashionable in Housing?

In: hardwood floors, twin home offices, storage space.

Out: spiral staircases, stainless steel appliances, glass front cabinets.

But you would already know this if you read Kirstin Downey's article "The Hot and the Not: Yesterday's 'Wow' Feature May Be Today's Dealbreaker" (Jan. 6) where she also reports that it's now a buyer's market.

So what are the basics for a sellable home? You've got to read her piece to find out.

Tax Time

It's that time of year again and this feature is back!

Every year I strive to bring you the latest tax tips and news. Specifically, read my column today, to find out about tax changes for 2006.

I'll provide other tax tips and information in future weeks leading up to tax day.

You are welcome to e-mail comments and questions to singletarym@washpost.com. Please include your name and hometown; your comments may be used in a future column or newsletter unless otherwise requested.