First Things First A midyear forecast is all well and good, but before you reach for a single stock or fund, make sure you've picked the low-hanging fruit. Here are seven smart money moves that can deliver huge long-term returns with almost no risk
By Penelope Wang

(MONEY Magazine) – Would you say no to a 13% return on your investment? Miss out on the single best way to boost your performance and reduce your risk? Pass up free money? Many of us do just that--by overlooking the building blocks of financial planning that are crucial to creating wealth. So before you snap up any of our eight best stocks for today's markets or our 100 favorite mutual funds, check whether you've covered these seven essentials.

1 Are you carrying any credit-card balances?

There's no bigger threat to your financial goals than mounting credit-card debt. Today's average credit-card rate is a hefty 13%--and as interest rates rise, card rates will escalate as well. So, as a first priority, eliminate that balance as quickly as possible. If you can spare only a few extra bucks a month to start, target the highest-rate debt first. For a debt-planning tool that will determine the quickest way to pay down your balance, go to the calculator section at

PAYOFF Wiping out a credit-card balance with a 13% interest rate is equivalent to earning a 13% return on your money--without any risk. You can't beat that.

2 Do you have an emergency fund?

Face it, bad stuff happens. It might be a routine hassle--say, your car breaks down--or a major crisis such as a job loss or a medical emergency. Either way, you will have to come up with cash in a hurry. That's why financial advisers urge you to tuck away at least three to six months' worth of living costs in a safe, easily accessible account, such as a money-market fund or a bank savings account. Fortunately, rising interest rates will begin to push up the paltry yields on short-term savings, so your rainy-day fund is likely to grow faster.

You can also treat your home as a reserve fund by opening a home-equity line of credit (HELOC) now and drawing on it if (and only if) you need the cash. True, the variable rates on HELOCs are rising--in June the average rate for a $30,000 credit line jumped from 3.02% to 3.22%--but the rate could rise another two or three points and still be historically low. Plus, the interest is tax deductible. Just make sure you check for minimum borrowing requirements and dormancy fees.

PAYOFF Short-term cash needs won't derail your long-term goals. And don't underestimate the benefit of sleeping better at night.

3 Are you getting free 401(k) money from your employer?

If you aren't plowing the maximum into your company's 401(k) savings plan, get started now--you're really missing out. Consider the advantages: Your money grows tax deferred until retirement, you get an automatic match on your contribution (typically 50¢ on the dollar), and your contribution reduces your taxable income, thereby cutting your tax bill.

PAYOFF A 50% match adds up to an instant, risk-free 50% return. You'd pass that up?

4 Are you saving outside your 401(k) plan?

Investors often rush to choose the best stocks and funds but ignore the most fundamental step: making sure they are saving enough to begin with. Click on any retirement calculator (try the one at, and you'll probably find that you need a bigger nest egg than you realized to secure a comfortable retirement, as well as to achieve other financial goals (college tuition, a second home, a trip around the world). To save regularly, take advantage of automatic investment plans.

PAYOFF Sock away just $250 more a month, and you'll end up with an extra $350,000 in 30 years, assuming an 8% annualized return.

5 Have you locked in your mortgage costs?

During this housing boom, an increasing number of buyers relied on adjustable-rate mortgages (ARMs) to lower their monthly payments--and thus afford a home. But ARMs are linked to short-term interest rates, so those payments have nowhere to go but up. Already, the average rate on a one-year ARM hit 4.36% in June, up from 3.42% in March (see the graph at right). The rates on fixed loans are heading higher too--from 5.41% to 6.3% over the same period--so if you plan to stay in your home for the long term, now's the time to think about locking in your rate, even if doing so costs you more. On a $300,000 mortgage, the difference in monthly payment between a one-year ARM and a fixed loan at today's rates is nearly $400. But in a year, that gap could be wiped out; within a few years, it could be reversed. If you expect to move soon and wonder if an ARM still makes sense, use one of the calculators listed above to work through the numbers and to create a worst-case scenario.

PAYOFF Even though a fixed-rate mortgage costs more now, your payments won't rise in the years ahead. That means peace of mind--and more free cash in the future.

6 Do you know what you already own?

Over the years you've likely picked up a variety of stocks, bonds and funds. Before you buy another one, ask yourself: Do I have any idea how this fits in with the rest of my investments? To be a successful investor, you need a plan. You should spread your money over a broad spectrum of stocks and bonds. Such diversification will protect against sharp swings in the market and, by helping you stay the course in rocky times, can improve your long-term returns. It's easy to put together an asset mix geared to your goals and risk tolerance by using tools on websites such as and our own, at Or simply follow one of our four model allocations in "Portfolio Tune-Up" on page 65. Once you have an ideal portfolio in mind and a picture of how your current holdings match up, you're ready to buy your next investment.

PAYOFF Having a diversified asset allocation is the most efficient way to reduce risk and boost your returns.

7 Do you have stocks and funds that you should sell?

Before you put money in the market, you may want to jettison some winners and losers--a sound money-management strategy that has the added benefit of freeing up cash for new investments. For starters, you should periodically rebalance your portfolio. Otherwise, last year's top performers will dominate, which heightens your risk and sets you up for a fall. At least once a year, sell enough of your winners to bring your allocations back to your targets, and funnel the proceeds into the out-of-favor groups. Thanks to the last round of tax cuts, capital-gains tax rates are 15% or less, the lowest we're likely to see for the foreseeable future (see the chart at right). So don't hesitate to take profits. You should also consider selling lagging investments that still, more than a year into the recovery, show no sign of coming back. You can use those losses to offset your gains.

PAYOFF By routinely rebalancing, you force yourself to buy low and sell high. And isn't that the whole point of investing?