12 Ways to Keep More of Your Money

Top financial planners give their best advice -- free of charge.

Rethinking Your Financial Plan

Ron Maxwell and his wife had "the big talk" while driving the back roads near their home in Stow, Massachusetts. Troubled by the poor performance of their investments, Ron suggested they might need professional help. Days earlier, he had sold bonds to cover part of the cost of college tuition for two of their three children instead of using stocks he and his wife had been counting on. "I looked at our investments and realized I no longer had a clue," says Ron, who works at a local software design company. "Our old strategy wasn't cutting it."

Today the Maxwells, both 47, are focused on protecting what they make and save rather than taking big risks with their money. Ron's wife, Starr, a full-time mom, says, "I've learned you no longer can afford to be lazy and let your money take care of itself."

Like the Maxwells, many people are taking steps to halt erosion of their savings and rethink their financial plans. Once confident in their decisions, many people aren't sure what to do to maximize returns in light of stock market fluctuations, new tax laws, low interest rates and skyrocketing real estate values.

"On an emotional level, people are petrified of making a mistake and losing more money," says Denise Hughes, a financial counselor in San Carlos, Calif., who has a master's degree in psychology. "The do-it-yourself investor of the 1990s is more comfortable now doing nothing."

But doing nothing isn't better than doing something smart, especially as college, weddings and retirement loom. Read on to see what financial advisory are recommending to their clients.

Saving

The Truth About Refinancing

While your home's value may have greatly increased, you may be paying more than necessary on the mortgage.

DO refinance if your mortgage rate is at least 1/2 point higher than the going rate, says Glenn Frank, a financial planner in Waltham, Massachusetts. Use the calculator at bankrate.com to do the math (click on the "calculators" tab and then on "mortgage").

DO consider a 15-year mortgage instead of refinancing a 30-year loan. Your monthly payments may be slightly higher, but you could ultimately save tens of thousands in interest payments, says Frank.

How so? Say you have 20 years left on a 30-year mortgage charging 6.5% interest. If you have $100,000 left on the loan, your monthly payment is $746. If you refinance using a 15-year mortgage at 5.5%, your payment will be $817. But you'll have knocked five years off the loan, saving $32,000 in interest. "That's $32,000 you won't be shelling out during retirement," says Frank.

DON'T use a cash-out refinance to whisk away credit card debt. It may not pay. Assume you have a $10,000 balance on a card charging 10%. Pay it off in four years and you'll shell out $12,192. But tack the $10,000 debt onto a new 15-year mortgage charging 4.5%, and you'll spend all those years paying off the loan for a total of $13,860.

True, without the card's debt you'll have an extra $177 a month. But the trade-off works only if you save that money, ideally in a 401(k) or IRA, says Frank. It's also a bad move if you rack up another credit card balance. "Then your house is a giant credit card, serving as collateral for that debt," he says.

Plan for Financial Aid

Most parents don't save nearly enough for children's education. "Only two of my 5,000 clients had saved what they needed," says Milton Eisenhardt, director of counseling services at College Money, a college-planning group in Marlton, New Jersey.

DON'T assume that investing in a 529 college plan is the best place for your savings. While a 529 plan offers tax-free growth and withdrawals for college costs -- and in some cases a tax deduction -- colleges look at these savings when sizing up eligibility and how much they'll fork over. The same scrutiny is given funds saved in a Coverdell IRA and in an account opened in your child's name.

DO save aggressively for college in a taxable account in your name if your household income is below $100,000. In this case, your child will likely qualify for some financial aid, says KC Dempster, College Money's program development director. Collegemoney .com offers a free quiz that helps you determine your eligibility for aid.

DO invest in a 529 savings plan if your income is higher than $100,000 and will likely remain at or above that level when your child enters college, says Dempster. In this case, the 529 plan is great because you probably won't qualify for financial aid anyway.

Investing

Expect Ups and Downs

Stung by three straight years of stock market declines, many people have been shifting to lower-risk investments.

But if there's a lesson in the past few years, it's that your portfolio should be able to keep its head above water during prolonged stock market declines and be positioned to grow when the market and economy soar. Taking too much risk can hurt your portfolio's growth rate, but so can hiding out in ultra-safe investments paying 1% or less.

DO own a strategic mix of stocks, advises Mark Gutner, a financial advisor in Garden City, New York. "The asset allocation I recommend for people in their late 40s or early 50s is 60% stocks and 40% bonds," he says. "Then you just have to invest regularly and stick to your allocation regardless of whether the economy is up or down."

DO use mutual funds for stock and bond allocations because they offer the most diversification -- thousands of different types of securities in some cases, Gutner

DO consider investing in funds that you'll hold on to for more than a year. Under the new tax law, long-term capital gains (profits on assets you've owned for over a year) are taxed at a maximum of 15%, down from 20%.

DO look at stock funds that pay dividends. Dividends on stocks used to be taxed at your personal income tax rate. Under the new law, they are now taxed at no more than 15%. Utility-stock funds and dividend-growth funds increase dividend payments annually, says Gutner. Investing in these funds will not only hold down taxes but will also sustain your portfolio's value in tough times, he adds.

Forget High Fees

Over the next ten years, achieving the kind of double-digit returns we experienced over the past 20 years will be much harder, predicts Harold Evensky, a certified financial planner in Coral Gables, Florida. "In the 1990s, the average rate of return for a portfolio allocated 60% to stocks and 40% to bonds was 13.2% after taxes and transaction expenses," he says. Over the coming decade, this rate is expected to be closer to 5.5% as the 50-year historical average returns to the neighborhood of 8%.

DON'T pay unnecessarily high investment costs and fees, Evensky says. That money could instead be in your account earning returns. For example, if you can save half a percentage point on your fund expense ratio (the fee that funds charge you each year to manage your money), your average investment return could be 6% instead of 5%, he says.

DO consider investing in no-load funds -- which charge the lowest possible ratio in their respective category -- to reduce your expenses, says Bryan Totri, a certified financial planner with Wellspring Planning in Roswell, Georgia.

The difference in returns can be significant. For example, a $10,000 investment in a fund with an annual return of 8% and annual charge of $1.10 for every $100 invested would grow to $37,359 in 20 years. But if that charge was less than a percentage point higher -- to $1.74 for every $100 invested -- the same investment over 20 years would only grow to $32,810. Retirement

Feather Your Nest Egg

When WorldCom filed for bankruptcy in July 2003, employee Ken Donaldson lost nearly 30% of his retirement savings, which was tied up in company stock. "I didn't plan to be retired in my early 50s," says Donaldson, who lives in Atlanta with his wife and two children and is looking for a new job. "After I left WorldCom in August 2002, I was scared and shifted almost all my assets into money market accounts. Now I'm investing a little at a time based on my asset allocation and how much I'll need to live on in about 15 years."

DO estimate how much cash you'll need each year to sustain your standard of living when you reach retirement. With this yearly sum in mind, calculate how big your nest egg has to be to produce that income stream, assuming your portfolio's value earns a conservative 5% to 6% a year. Then factor in the taxes you'll owe on the assets you withdraw from your IRA and other retirement accounts.

For example, if you'll need $50,000 a year to cover your annual retirement costs starting at age 65, you'll need to have saved $1.3 million, assuming the nest egg earns 5% a year and that your income will be taxed at the 25% rate. "That's a sobering number, especially today," says Evensky. "It makes people realize that every dollar that remains in their account counts and that they have their work cut out for them. But it can be done."

DO save as much as possible in accounts that grow tax-deferred to take full advantage of compounding. This year you can save up to $3,000 in an IRA; if you're age 50 or older, you can save up to $3,500. The money you save in taxable accounts can be invested in a low-fee municipal bond fund to minimize the taxes you'll owe, says Evensky.

DO consider boosting your 401(k) contribution if your company re-deuces or stops its match to cut costs, suggests Evensky. Think the loss of a company's match isn't a big deal? Say, for example, your company stopped contributing $6,000 a year to your plan. If you and your spouse invest $3,000 each annually in IRAs, after 15 years at, let's say, 7.8%, you'll have $160,000. That's the amount your employer's matching contributions would have earned. In fact, think about increasing your IRA, or even saving in taxable accounts, to make up the lost amount, Evensky explains.

You don't need an MBA, a special talent or tons of luck to keep more of your money. All you need is a plan and a $2 calculator.