Smart money moves for the new year: putting things in place now can enhance your portfolio in 2006.

Like many Americans, Sheret Payton has a cash flow problem. She adheres to a budget, but it rarely seems to cover all of her expenses. The 24-year-old Chicago native lives at home with her father and has a 4-year-old son, Robert, to care for. A conscientious adult, Payton pays rent, tithes, and for childcare and groceries--all on her $12-an-hour job as a medical collections representative in Olympia Fields, Illinois. She has even managed to start setting aside $100 per pay period. "I really want to start saving," she says. "I have two accounts, and in one I direct deposit $100 for savings every pay period. But it seems like I always use it.

Payton has only been on her current job for seven months so she hasn't accumulated much. Every now and again, she dips into her savings account because "something always comes up." But she knows that won't cut it if she wants to reach her goals. "I eventually want to buy a three-flat home. I'd rent the other two [units] out and live in one while I still work and go to school at the same time," she says. "I'm not trying to make any excuses for my situation; I'm just trying to help myself in any way possible."

Most consumers could use some help these days. Increasing energy costs, the onset of inflation, higher interest rates, and stagnating wages have all begun to pinch our bottom lines. So whether you're an entrepreneur with a startup, a seasoned investor, or you have a limited income, here are a range of actions you can take to move your financial fortune forward in 2006.

GET ON TRACK

* Build a financial plan. It's important to start the year off right by understanding where you are going. David A. Hinson. president of Wealth Management Network, says creating a real financial plan with a professional financial adviser or setting up your own financial budget will get you on track to meet your financial goals. Brent Neiser, a certified financial planner and director of collaborative programs at the National Endowment for Financial Education, says creating a financial plan early is important because many people may have experienced major adjustments in 2005 that could affect their financial situation. You may have changed jobs, bought or sold a business or some real estate, received an inheritance, or started planning for a child's education. There changes could require you to come up with a new financial strategy.

* Update your inventory of personal items. Neiser says people should take video footage of their personal belongings to protect their assets. "With the hurricanes, we saw the value of having a good inventory record when filing claims," he says. "Walking around with a digital camera lets you narrate the items you have and even make statements about the history of some items, or their significance in your family."

* Begin budgeting for special, planned expenses. It's a good idea to set aside money for big purchases you have planned for 2006, says Neiser, such as a new car or some home improvements.

SAVE MONEY

* Shop in January. Richard Booth, president and CEO of FindSavings.com, a Website that aggregates shopping Websites and coupon providers, recommends stocking up on gifts for 2006 holidays during online clearance sales in January. Most sites offer free shipping, or at least 10% off. Check out www.over stock.com and www.buy.com, says Booth.

* Increase your savings by 1%. Although most incomes have been flat for the last few years, Hinson advocates saving a small additional sum every year as a wealth-building goal. You can use a portion of your raise if you receive one, your tax return, or you can commit to having an additional amount deducted from your paycheck. "Interest rates are increasing, so you will be able to get higher yields for savings accounts," Hinson notes.

* Downsize your car. "If you have a gas-guzzling car, downsize it," says Hinson. "Gas prices have come down, but we've seen where they can go." If you drive to work on a regular basis, using a more fuel-efficient vehicle can add significant savings. (See "Don't Be a Fuel Fool," Shopsmart, this issue.)

* Lock in a fixed rate. Wherever possible, change your adjustable rate mortgages and adjustable rate credit cards to a fixed rate. Depending on your credit rating and the cost of refinancing your mortgage, you could still see significant savings. Go to www.card web.com.

INVEST WISELY

* Maximize your 401(k) contribution. Review your contribution to your employee retirement plan. "The new 401(k) rules allow you to save $15,000 for 2006," says Hinson. "Make sure you adjust your contribution for additional pre-tax savings."

* Stay away from long-term bonds. As bond yields increase, bond prices decrease. "Interest rates are going up and longer-terms bonds get hit hard when interest rates continue to rise," says Steven L. Sanders, CEO of 1st Genesis Financial Group. Sanders recommends investing in AAA-rated, high-quality corporate bonds, shorter-term government bonds, and intermediate corporate bond funds. "You don't want to run away from bonds," he stresses. Conservative investors can purchase inflation-adjusted bonds (e.g., TIPS, I-Bonds).

* Choose large-value, dividend-yielding stocks. When talking equities, Sanders prefers large established companies that give investors a dividend. "The dividend yield helps investors a lot. They get a two-pronged positive hit--they receive the yield as well as the appreciation on the stock."

* Look at small-cap and mid-cap value stocks for growth. Smaller firms have learned to run more efficiently in the tough economic environment and have become very good values. "Some of these mid-cap companies may turn out to be great targets for acquisitions of larger companies," says Sanders. "Larger corporations that are looking for a strategic advantage in the marketplace will look at some of those companies as a way to help them get there."

Many larger corporations are now willing to use cash they've accumulated over the last few years to pay a higher price for acquiring strategically valuable firms. Sanders reports that there was an increase in mergers and acquisitions in the last half of 2005 that may continue through 2006 and 2007. Mutual funds that invest in efficient, smaller firms stand to be big winners.

* Increase international stock exposure. "You've got to have at least a 10% to 15% allocation of your portfolio in international [stocks] today," says Sanders. There is much faster growth happening outside the U.S. these days, and Sanders advocates buying an international mutual fund. Country-specific funds for China and Japan have been the hot sectors of late.

INSURANCE AND ESTATE PLANNING 

* Reassess your insurance needs. Be sure you have enough insurance to cover all of your property and potential liabilities. "Review what you own and what your vulnerabilities are. They could include a teenaged driver, mean dog, or a new pool," says Neiser.

* Update your homeowners insurance. Hinson explains that since the housing markets have been so strong, "there has probably been an increase in the value of your property. So you want to make sure you are fully covered."

* Go to the doctor and dentist. If you pay for health insurance premiums, use the services, because if you become ill, you cannot earn income. "Make sure that you take advantage of the health insurance you are paying for," says Hinson.

* Update estate planning documents. Make sure wills, your power of attorney, and your medical power of attorney documents reflect the births, deaths, and divorces that have occurred in the family during the previous year.

FOR BUSINESSES

* Reassess your business plan. Meet with a financial adviser and make sure your business is serving your cash needs as it grows. "You want to maximize the tax laws, maximize the investment strategies, and look out for your heirs so that you can create a legacy that doesn't die with you," says Sanders. "We are creating more wealth now, with more African American-owned businesses than ever before, but we're not doing enough planning to preserve, protect, and transfer that wealth."

* Review business insurance needs. Last year, Sanders worked on a strategic financial plan for Chester Fulton's business in Pennsylvania. Fulton is one of four partners who Operate the ADCM L.L.C. Community Correctional Facility in Philadelphia, which houses prisoners serving short sentences. Fulton, 49, says the facility has been operating for a little more than a year, largely because his accountant referred him to Sanders for advice on getting the business off the ground.

Fulton says, "Steve helped us tremendously because he guided us to United Bank, which wound up helping us get money for renovations and operating costs, which helped us get our first contract." Sanders is Fulton's personal financial adviser, and Sanders knew it was important to integrate the business into Fulton's overall financial plan. "Steve helps Out with the company because he's looking out for my interests and my family's interests."

Perhaps the best thing Sanders did for Fulton's business was make sure that he and his partners understood the importance of "key man insurance." Sanders structured insurance policies that would take care of the needs of the partners' families in the event any of the partners died or became disabled. That way, the business would not have to be liquidated for the financial security of the families, and it could be passed down to future generations. "We never thought about insurance for the success of the business," says Fulton. "It is important to not suck the business dry [because you have to] make sure your family is OK."

* Upgrade computer backup capabilities. Whether you have a home-based business or operate out of a storefront or office building, Hinson suggests making sure your computer system has remote backup capabilities. Also, make sure that there are copies of your backup files in a secondary location. "Most businesses lean on their computers tremendously," says Hinson. "And one of the challenges people had coming out of Katrina was that they lost their computers, which shut their businesses down."

Tips On Taxes

1 Organize tax records.

With tax season staring you in the face, you should organize everything to avoid overlooking important documents or having to amend tax returns later. "A lot of times, people discover documents after they have had their tax return prepared and miss out on something that could benefit them," says Neiser.

2 Assess how life changes may affect your tax liability.

Many people may have experienced major adjustments in 2005 that can affect their tax situation in 2006. If you have purchased property, had a baby, gotten married or divorced, or received an inheritance, it could affect your taxes. You could receive significant tax breaks or be responsible for paying additional taxes.

3 Begin setting aside money to pay taxes on capital gains.

"Anyone with mutual fund accounts outside of a retirement plan may receive taxable distributions for 2005," Neiser says. The 2005 distributions are likely to be higher than distributions from the last few years due to the rise of the stock market.

4 Meet with a financial planner to discuss upcoming life changes.

You may expect to change jobs, buy or sell a business or some real estate, or begin planning for college. These can be lifestyle changes that affect your tax situation. An adviser can help you prepare for these events.

--Additional reporting by Aissatou Sidime