Seven steps to financial fitness

"Not only do you want to see that the credit-card companies have noted that you've paid off debt or closed accounts, you also want to check for identity theft," says Joel Ticknor, a certified financial planner in Reston, Va. "The idea behind a credit report is to put yourself in an improved position for the next time you borrow money."

For a free credit report, contact any of the three credit-reporting agencies: Equifax (www.equifax.com), Experian (www.experian.com), or Trans-Union (www.transunion.com).

4. Reevaluate your portfolio. One of the biggest mistakes you can make is to keep holding on to a losing investment. "The beginning of the year is a very good time to take a good, hard look at your portfolio," says Mark Kaizerman, a certified financial planner in Natick, Mass. "If an investment doesn't feel right, get out of it."

Holding on to winners too long is also a mistake. That's why it's a good idea to have a sell discipline in place - for winners and losers. "People need to remember: You can never exactly time the market - either at the top or the bottom," says Mr. Edelman.

Many financial planners say you should also use the New Year to look at your allocation for your 401(k). "It's a very good time to consider investing in international stocks or funds," says Dixie Butler, a certified financial planner in McLean, Va. "This type of investment - balanced with your other investments - actually decreases risk."

5. Update your insurance and will. It may sound like a pitch from an overzealous insurance agent, but most people are underinsured. Just ask Florida homeowners who didn't check their insurance until after one of the busiest hurricane seasons on record.

"Many homeowners have not increased the value of their homeowner's policy - taking into account the rising value of their homes," says Mr. Ticknor. "With home values rising steadily, chances are they are not prepared should something catastrophic happen to their home."

When updating a home policy, consider the replacement cost of objects and increasing the deductible. Increasing the deductible from $250 to $1,000 can save hundreds of dollars in annual premiums.

Reevaluate your life insurance, too. You may be underinsured if your net worth has risen substantially.

"Make certain you have the correct beneficiary information on all of your policies," says Mr. Kaizerman. "People sometimes forget to update their policies in the event of a divorce, a remarriage, or an untimely death in the family."

Finally, if you don't have a will yet, get one. And if you already have one, make certain to review these documents. Identify items that are incomplete, outdated, incorrect, or missing. Start now to fill in those blanks.

In addition, a surviving spouse needs to know many things, such as the location of the will and when it was last updated.

6. Stick to a budget. The key is to separate your required needs (rent or mortgage, utilities, insurance, food, and clothing) from discretionary desires (entertainment, cable TV, and eating out). Then try to direct at least 4 to 5 percent of your income to savings and investments.

"Budgeting and making spending priorities are important goals regardless of your income level," says Mr. Freedman.

7. Develop an emergency fund. Many people think "it won't happen to me." But you never know when an emergency can strike. For that reason, consider setting aside money to cover a financial emergency such as the loss of a job.

"Try to set aside six months for living expenses," says Ms. Butler. "Treat the emergency fund as a monthly bill you must pay and put it in a fairly liquid vehicle, such as a savings or money-market account."

Having an emergency fund can give you great peace of mind and is a smart alternative to using a credit card to help cover a major expense.

"If you develop an understanding of your income and expenses, then socking money away for a rainy day won't be that difficult," says Kaizerman. "Of course, meeting with a financial adviser is always a good idea to determine how much money to put into an emergency fund and how much to invest."

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