A new year is a time for self-improvement and renewal. Where bad habits and regret are cast aside and replaced with virtuous activities that are intended to make us better human beings. Good intentions and optimism may carry the day and help some attain their goals of better health, greater wealth, or a host of other desirable outcomes. The odds, however, are stacked in favor of inertia with more than 80% of new year’s resolutions failing by mid-February.
Health and financial goals are frequent targets of unbridled optimism. Eating better, saving more money and exercising are perennial favorites, comprising over two-thirds of total resolutions. Only resolving not to make a new year’s resolution garners more votes. Staring into the face of this statistical abyss, it helps to clearly define your goals and to have a detailed, actionable and realistic plan (written, please) to help you achieve them. Here are a few financially-themed goals that you might consider including in your own, no-doubt destined to be highly successful, 2019 itinerary.
- Check your credit: starting with something easy helps to build momentum and confidence. And it doesn’t get much easier than requesting a copy of your credit report. Review your report from each of the three credit reporting agencies for accuracy and file a dispute to correct any errors that you find. If you uncover accounts that you did not open or feel you may have been the victim of identity theft, take action immediately by visiting the Federal Trade Commission’s identity theft website. It’s full of useful resources to help you take back control of your identity and limit the damage to your credit.
- Organize your debt: make a list of your outstanding obligations and rank them in order of priority. Revolving debt with the highest rate of interest should be paid first, followed by credit cards with lower interest rates and variable-rate loans that may become more expensive to repay as interest rates increase. Paying down non-deductible loan balances, such as portfolio lines of credit or home mortgage balances that exceed the thresholds for deduction should be next. Further down the list are student loans and mortgage interest, both of which may provide tax benefits that help to offset their cost.
- Manage your short-term savings: having adequate emergency reserves is a foundational element of financial planning. Those with very secure incomes that are at low risk of incurring large, unexpected expenses may require only a modest emergency fund, while those with highly volatile earnings should consider maintaining a year or more of living expenses in safe and liquid savings. Using savings to pay down high-interest debt may be advisable for those at little risk of a job loss, but should otherwise be approached with caution. And in most cases, shoring up your short-term emergency savings should take precedence over saving for retirement or other long-term goals. Bolster your savings through automatic payroll deductions, and use a dedicated savings account rather than allow the funds to accumulate in your checking account. This way they are less likely to be spent on non-emergency expenditures.
- Make a budget and stick to it: budgeting sounds more difficult than it is, and can be more rewarding than you might expect. To get started, list your liabilities, insurance payments and other fixed expenses. Next, review your bank and credit card statements and make an average of your largest expenses and when they occur. Then move on to the smaller items while doing your best to avoid catch-all categories such as “miscellaneous expense”, which provides little useful information. With your categorizing complete, make note of which expenses are necessary and which may be curtailed if necessary. Finally, take your net income and subtract any ongoing after-tax savings to determine your net cash flow. If a large disparity exists between your net cash flow and your monthly budget chances are you’re misstating your expenses. Use your budget to efficiently allocate savings and identify opportunities to trim expenses without crimping your lifestyle.
- Check your paycheck: after the passage of The Tax Cuts and Jobs Act of 2017, the IRS urged taxpayers to review and update their payroll tax withholdings. Many taxpayers have failed to do so and are at risk of an unpleasant surprise when they file their taxes. Having too little tax withheld leaves you exposed to underpayment penalties and/or a large tax bill while having more withheld than is necessary reduces the size of your paycheck. This may result in unnecessary and expensive short-term borrowing, or limit your ability to save money for retirement.
- Save more for retirement: armed with your budget and a review of your payroll withholdings, look for ways to boost your retirement plan contributions. How much should you save? As much as possible is a common answer, with most advisors recommending a minimum of 15% of income. Older workers and those that have accumulated only modest savings should save at a much higher rate. Use payroll deductions and personal finance apps like Acorns or Albert to help stash extra cash.
- Fund an IRA: an individual retirement account can be a great way to save money for retirement. The 2019 contribution limit for traditional and Roth IRA accounts is $6,000 ($7,000 if you’re age 50 or older), but beware income-based contribution limits that apply to Roth contributions and restrictions on the ability to deduct your traditional IRA contribution if you are covered by a workplace retirement plan.
- Review your financial plan: a new year is a great time to review your planning to ensure that you are on track to reach your goals. Be sure to differentiate between temporary setbacks, such as poor portfolio performance resulting from a stock market correction, and more enduring ones that are likely to have a material impact on your plan. Major changes such as a job loss or change in health may require you to make some tough choices, but the effects may be mitigated if they’re identified early. For example, inadequate retirement savings may be remedied by simply saving more, and this is especially effective for younger workers. Those closer to retirement age may be staring down less appealing options such as working longer, reducing their expenses or engaging in part-time work during retirement. While a financial plan won’t solve your financial problems, it will make you better informed, and that alone can help you to make better financial decisions.
- Rebalance your investments: buy low and sell high is the mantra of most investors, but too few of them are successful in following it. While attempting to time the markets is a mug’s game, realigning the weightings of your portfolio to a target allocation can help lower your portfolio’s risk and may help to boost its return over time. Retirement accounts whose holdings have drifted by more than 5% from their original target are a good candidate for rebalancing. Taxable accounts, on the other hand, may be allowed a wider berth to account for the tax-related costs of rebalancing.
- Review your estate plan: a new year is a good time to take stock of your estate planning. Consult with your attorney or financial planner to determine if changes should be considered, and be sure to review your beneficiary designations to ensure they reflect your wishes. Common reasons to update your plan may include the birth or adoption of a child or grandchild, death or incompetence of the guardian for minor children that is named in your will, illness or disability of a loved one, a change in your financial situation such as the receipt of a large inheritance, legislative updates that may affect your current plan, or changes to your goals that have occurred since your last review.
Adopting ten resolutions is surely too ambitious, even for the most disciplined among us. Start with one or two that are most important to you and see them through to fruition before moving on to the rest. Research shows that the simple act of writing down your goals and announcing them to others dramatically increases the likelihood of success. There is no one-size-fits-all strategy when it comes to resolutions, so hunker down and don’t let the inevitable setbacks to your progress keep you from reaching your goals.
Good luck and best wishes for a happy and healthy new year.
John Male CFP®, RICP®
The Gassman Financial Group
G&G Planning Concepts, Inc.
9 East 40th Street, 5th Floor
New York, NY 10016
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