Making New Year’s Resolutions is a time-honored tradition.
Every New Year’s Eve, millions of people around the world put pen to paper in hopes of improving their lives in the coming year. If you’ve ever resolved to lose weight, go to the gym, or organize your finances, you’re in good company: an estimated 197 million Americans will be setting New Year’s resolutions this coming year.
It’s easy enough to set your resolutions. Unfortunately, our busy lives usually get the better of our good intentions. In one example, Inc. magazine reported that saving money is one of the top five New Year’s resolutions and also in the top five most commonly failed resolutions. This isn’t surprising when more than half of respondents are likely to fail their resolution before the end of January.
The good news about setting New Year’s resolutions? You get a fresh crack at them each year! And when it comes to your financial New Year’s resolutions, you can work with your Financial Advisor to see them through.
With the start of 2021 just weeks away, here are some financial New Year’s changes and strategies to improve your financial well-being in 2021.
1. Calculate your net worth
If you haven’t done so already, the New Year is a good time to take a big-picture look at your overall financial life.
Calculating your net worth is an essential step to evaluating your financial health. Think of it as your financial report card. As you recalculate and track your net worth year after year, you’ll have a better grasp of whether you’re making good financial progress or heading down a dangerous financial path.
To calculate your net worth, start by adding up the value of all your assets, including:
- Bank accounts and investment accounts
- Real estate
- Your vehicles
- Your personal assets
- Any other items of value you own
Next, add up your total liabilities, meaning all of your outstanding debts. Be sure to include:
- Mortgage loans
- Car loans
- Student loans
- Credit card debt
- Loans you owe to family and friends
- Personal loans
- Payday loans
Finally, subtract the value of your liabilities from the total value of your assets to figure out your net worth.
It's a simple way to measure where you stand when it comes to your finances. Make note of upward and downward trends to get a better understanding of what is or isn’t working in your spending and saving strategies.
2. Get clear on your financial goals
If you can't measure it, you can't improve it.
Founder of Modern Management
Choose goals that you can get excited about.
Vague goals, like “financial security” sound good but are difficult to quantify. Instead, define what financial security means to you using the SMART framework:
For instance, maybe you want to own two million dollars’ worth of stocks by the time you’re 65. Or maybe you want to retire in Miami in 15 years with enough income to take a European cruise each year. Now you have goals that you can translate into a savings and investment plan that you can start today.
Next, put your goals into writing.
By putting your goals down on paper, you’ll have a clearer picture on what it is that you want. Write deliberately and precisely about your short-, mid-, and long-term goals.
If you’re one of the 53 percent of Americans whose goal is to save more, be specific about how much you’d like to save. Check your year-end reports from your credit card companies or financial institutions; this will help you identify budgeting leaks and spending patterns to adjust.
If you’d like to have a comfortable retirement, define what that is in concrete terms, and work backward to develop your plan of action.
Once your goals are written, start tracking and monitoring. Keep yourself accountable on pen and paper or an Excel spreadsheet. Depending on the time frame of each goal, mark your calendar for monthly, semi-annual, and annual check-ins.
Remove the temptation of easy access by putting your savings on autopilot. Set up an auto-transfer of amounts earmarked for savings from your checking account to designated savings or investment accounts that aren’t easily accessed.
Don’t forget to make it fun! Create a “reward” budget for meeting each one of your goals successfully. Whether that means opening a nice bottle of wine or indulging in a spa treatment, it’s important to celebrate all the small wins.
3. Set a smart spending strategy
Now that you’ve clarified your goals, it’s time to take concrete steps toward realizing it. Mapping out the incremental steps can make the goal seem more achievable.
In order to set yourself up for success, create a smart spending strategy.
How to Set a Smart Spending Strategy
Figure out how much you spend each month
This includes monthly bank statements, investment accounts, recent utility bills, mortgage statements, credit card bills, loan payment books, and any information regarding a source of income or expense. You want a clear estimate of your monthly average of your income and expenses.
Start a spreadsheet, beginning with your income
List each source of income and record the average monthly amount of each source. Record all actual take-home pay, as well as any outside sources of income.
Create a list of monthly expenses
Write down a list of all the expected expenses you incur over the course of a month.
Break expenses into two categories: fixed and variable
Fixed expenses are those that stay relatively the same each month.
These expenses include your mortgage or rent, car payments, cable television, credit card payments and so on.
Variable expenses are those that change from month to month.
These include items such as groceries, entertainment, eating out, fuel costs, and gifts.
Total your monthly income and monthly expenses
If your total shows that you have more income than expenses, you have a surplus—and that’s a great place to start. This means you can make decisions about spending the extra money. You may choose to pay more on credit cards to eliminate debt faster or to travel more often. If your expenses are more than your income, you will have to make adjustments to cover the shortfall.
Adjust your expenses
Are your expenses higher than your income? Look at the variable expenses that you can get rid of. Expenses for gifts and entertainment are typically the easiest to delay. Perhaps it’s time to cancel magazine subscriptions. Maybe eating out less will save enough to create a surplus.
Commit to review your spending plan every month
It is important to review your spending plan on a regular basis to monitor whether you are on track. After the first month, it will be necessary to compare your actual expenses with those you had planned. Oftentimes, an expense has been left out or was unexpected.
Once you’ve gained control of your spending and have a reliable, workable plan in place, you’ll know exactly where your money comes from and where it goes—and that can make for a much better year.
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4. Get a hold on your debt
Look at your debts, one by one.
Mortgages, business loans, and student loan debts are referred to as “good debt,” because they’ll usually help you build wealth or increase income over time. Credit card debt is referred to as “bad debt” because you’re borrowing money to purchase depreciating assets.
See if you can cut down the number of bad debts you have. If you are holding a monthly balance on your credit cards, develop a plan to pay off that debt. Paying more than the minimum payment amount every month will help you pay off the debt faster. Try renegotiating the terms of loans and interest rates with lenders and credit card firms.
If you don’t have any bad debt, congratulations! Think about paying down your “good debt” more quickly, like by paying some extra principal toward your mortgage payment each month. However, if you must choose between adding to your retirement nest egg and paying extra on your mortgage, talk to your Financial Advisor to determine which option is more suitable for you.
5. See if you can solidify some college planning variables
If your child or grandchild has entered their adolescent years, it’s time to start seriously planning for college costs.
Look around to get a good estimate of the cost of attending local and out-of-state universities. You can even begin exploring all your options for grants and relevant scholarships, as well as financial aid packages, to offset the sticker shock of college tuition. If you’ve already started a college savings account, speak to your Financial Advisor to figure out how those savings need to grow in the next few years.
6. Double down on your retirement savings
You’ve heard it time and time again: for a successful retirement, save early and save more.
Aim to save and invest 10 to 15 percent of your income in a tax-sheltered account. If your company offers to match your 401(k) contributions, contribute at least enough to get your employer match. And take advantage of tax-deferred growth with an IRA.
Here’s an example of the power of compounding interest. A 25-year-old who saves $6,000 per year for 40 years, assuming a 7 percent annual return, would have nearly $1.2 million by age 65. If the same individual waited until 35 to begin saving $6,000 for 30 years, they’d have less than $600,000 in retirement.
Contribution limits are set at $19,500 for 401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan. If you will be 50 or older in 2021, you can make an additional catch-up contribution of up to $6,500 to those accounts. The 2021 limit on IRA contributions is $6,000, and $7,000 if you will be 50 or older at some point in the year.
Under 40? Automate your contributions to retirement and investment accounts. Time is on your side, and an early start means more years of compounding for your invested assets.
7. Rebalance your portfolio
A well-balanced portfolio requires some tending.
Rebalancing refers to realigning the weight of the different assets in your portfolio in order to maintain your desired asset allocation. Your desired asset allocation will change as your time horizon, risk tolerance, and financial goals evolve. Those changes can impact the assets in which you invest.
In general, you should be rebalancing at regular intervals—monthly, quarterly, or annually. That way, you won’t subject yourself to the emotional distress of witnessing short-term volatility, but you’ll still understand the macro trends in your investment mix. A systematic approach helps you take some of the emotion out of investing and ensure a balance that makes sense for your evolving financial goals.
8. Consider getting life insurance and disability insurance coverage
Life insurance and disability insurance are both important for working families because they protect finances from disaster.
Life insurance and disability insurance cover two different kinds of disasters. Life insurance won’t pay out for disability, and vice versa.
Life insurance pays a death benefit to your beneficiaries if you die while under coverage. In some cases, such as terminal illness, your beneficiaries can access living benefits early. You can choose between term (short-term) and whole life life insurance policies.
Disability insurance pays part of your salary, usually 60 percent, when you become too sick or injured to work. You can choose between short-term (whose benefits generally expire after two years or less) and long-term disability policies.
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9. Prepare & update a will and trust
When it comes to protecting your loved ones, having both a will and a trust is essential. Avoiding estate planning is risky because it leaves the fate of your finances up to the courts if you pass away. It’s much easier on your loved ones if your final wishes are spelled out in a legal document.
A will is a legal document that instructs how your assets are distributed after your death.
A trust is a legal entity, existing for the sole purpose of protecting the assets in your estate. A trust becomes the legal owner of your assets the moment the trust is created, and will cover your estate’s finances and allow the details of your finances to remain private.
Wills and trusts each have their specific uses. For example, you can name a guardian for your children and specify funeral arrangements in your will. On the other hand, you can plan for disability or tax savings using a trust. Your attorney can tell you how best to use a will and a trust in your estate plan.
If you’ve already prepared a will and a trust, review them every five to 10 years to ensure that they still reflect your wishes.
10. Open and fund a Health Savings Account (HSA)
Health Savings Accounts (HSAs) are one of the most flexible savings tools available today.
An HSA is a tax-advantaged account, just like your 401(k) and IRA, which means your pre-tax contributions grow tax-free. Any interest, dividends, or capital gains you earn are nontaxable.
An HSA can move with you to a new company. Since you own the account, it goes when and where you do.
If withdrawals are used to pay for qualifying medical expenses, they’re tax- and penalty-free. The balance can be carried over from year to year; HSAs are not “use it or lose it” as with flexible spending accounts (FSAs).
Using an HSA to save for retirement medical expenses is a better strategy than using retirement accounts. Unlike a 401(k) or traditional IRA, an HSA doesn’t have any rules around required minimum distributions. And after you turn 65, you can withdraw from your HSA for any reason, penalty-free. (But if funds are used towards non-medical taxes, you’ll have to pay income taxes.)
We Can Help
Each new year is a classic season for self-reflection and goal-making. Use this time to think through what financial resolutions are helpful and achievable—and get started.
If you need help planning and implementing a successful financial strategy, please fill out the form below. We look forward to hearing from you.
DISCLAIMER: Advisory Services offered through Prosperity Financial Group, Inc., an Independent Registered Investment Advisor. Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Prosperity Financial Group, Inc. and Fortune Financial Services, Inc. are separate entities.