10 Financial Resolutions for a Brighter New Year
10 Financial Resolutions for a Brighter New Year
December 23, 2015
It's that time again—the time to reassess your finances and commit to making next year your best financial year yet. So in the spirit of the season, here's my annual 'financial shape-up' column.
But before you read on, here's something to think about: it's not about how many resolutions you make, but how many you're actually able to keep. Just as it's easier to stick with resolutions to shape-up physically if you have concrete and realistic goals, giving yourself some attainable financial goals will help you develop—and stick with—a financial program that will produce results.
Keep these goals front and center as you take these recommended steps to a more financially secure 2016.
1) Assess your current situation.
This is the first step in making positive changes. Look at what you own and what you owe to find out if you're in the red or the black. An online worksheet can help you easily add up assets and subtract liabilities to get a snapshot of your current net worth. If you have net worth statements from previous years, review and compare them to help understand your financial trends—and decide where to make changes.
2) Look at last year's spending.
Is your money going where you really want it to go? It will if you spend mindfully. Basically this means making spending decisions in the context of your goals. So if one of your top goals is to build your retirement nest egg, do you need to spend less to save more? Does taking that big vacation mean dining out less often? Whether or not you need to reprioritize spending, having an awareness of patterns will help you make better decisions throughout the year.
3) Make a 2016 budget.
Now that you've looked at last year's spending, focus on your budget for 2016. Track your spending for a month to see where your money is really going. Do you need to make adjustments—a little more here, a little less there? Take a fresh look at your essential and nonessential expenses (an online calculator can help). If during the year you have to spend beyond your budget, decide then and there how you'll bring things back into balance. Don't let overspending become a habit.
4) Get on top of debt.
Not all debt is bad (for instance, a mortgage), but there's really nothing good about carrying a credit card balance. Systematically pay down balances by focusing on higher interest cards first. Once you're at zero, resolve to charge only what you can pay off each month.
5) Build an emergency fund.
Everyone's situation is different, but bad things—an illness, the loss of a job—can happen to anyone. So protect yourself. Ideally, keep enough cash in an easily accessible account to cover three-to-six months' worth of essential expenses (more if you're retired). Promise yourself you won't touch this money unless you absolutely have to.
6) Review your insurance coverage.
Certain types of insurance are essential: health, car, homeowners or renters insurance. Make sure you have adequate coverage for these important things. You might then look into disability insurance if you're in your peak earning years; an umbrella policy if you have significant assets; and life insurance if you have dependents. But be cautious about insurance you probably don't need. To me, money for things like life insurance for children, flight insurance, or even rental car insurance is better spent elsewhere.
7) Check your progress towards retirement.
This is a big one. Whatever your age, you should be saving regularly—ideally, automatically—whether it's through an employer plan, an IRA or both. Use the New Year as a motivation to review your retirement goal and see if you're on target. If not, ramp up your savings. If you're just starting to save and you're in your 20s, 10 to15 percent of your annual salary should do the trick. In your 30s, you should earmark 15 to 25 percent toward retirement. In your 40s and older, you're looking at 25 to 35 percent.
8) Rebalance your portfolio.
This is the ideal time to review and rebalance your portfolio. If you didn't do a 2015 year-end review, start 2016 by looking at your asset allocation and making changes to keep your investments on track with your goals and timeline. Take advantage of online tools and quarterly reports available from your broker. If your investments have grown beyond your comfort level in managing them, seek out a financial advisor who can partner with you throughout the year.
9) Create/review your estate plan.
You may not need a complex plan, but don't put off creating at least a simple will, particularly if you have minor children. Review beneficiary designations on your retirement accounts and insurance policies, especially if you've had a life change such as a new baby, marriage or divorce. An advance health care directive is also a necessity to protect both yourself and your loved ones.
10) Keep the dialogue going!
Lastly, make money an ongoing topic of conversation. Talk to your spouse about your plans and decisions. Don't hesitate to share your financial know-how with your children or other family members. Encourage everyone to ask questions and freely discuss financial concerns and insights.
I hope this list provides inspiration to renew, refocus and resolve to get—and keep—your finances in the best shape ever. Here's to a happy and financially rewarding 2016!
Rebalancing and asset allocation cannot ensure a profit, do not protect against losses, or guarantee that an investor's goal will be met.