Would you like to manage your money more thoughtfully, but aren't quite sure how to do it? Here are some guidelines to get you started and help you stay engaged with your finances throughout the year ahead.
1. Set SMART financial goals
The first step is to set financial goals that are Specific, Measurable, Achievable, Relevant, and Time-bound, or SMART. The idea is not just to proclaim a goal, but to give yourself benchmarks against which you can measure your progress.
Using the SMART approach will force you to be more precise about what you want to achieve and give you less room to make excuses should you fall short. Here's an example to get you started:
Vague goal: Contribute to my 401(k) each month.
SMART goal: Contribute 5% of my salary to my 401(k) each month in order to receive my employer's full matching contribution.
- The goal is specific: If you don't already know your employer's matching percentage, ask your Human Resources department.
- The goal is measurable: You can easily see whether you're having enough deducted from your paycheck each month to get the match.
- The goal is likely achievable, since it's a small percentage of your pay and can be automatically withheld.
- The goal is relevant, since saving for retirement is among the most important financial issues anyone will face.
- The goal is time-bound, because you've committed to contributing a specific amount each month.
Be sure to take the time to actually write down your SMART goals, which will form the basis of your financial plan. Research has shown that creating a written financial plan is more effective than simply thinking or talking about your goals. Indeed, 65% of people who have a written financial plan say they feel financially stable, whereas 40% of those without a plan feel the same way, according to Schwab's 2021 Modern Wealth Survey.
2. Make a plan to achieve your goals
Once you've set SMART goals, rank them in order of priority and assign a price tag to each. Start with your needs; then include your wants and wishes. This will give you a sense of how much money you'll need to save each month to achieve them.
The key here is to arrive at a number that you can realistically stick to—and then committing to your target with a written financial plan. Even if your goals are challenging, trust that it's better to make progress gradually, month by month, than to do nothing and hope for the best.
That said, if this exercise reveals that your plans are simply too much of a stretch, then you know it's time to adjust.
For example, if your home-buying plans give you sticker shock, you might want to reconsider your housing budget or give yourself more time to save for the down payment. If the cost of a child's education looks too challenging, you might need to spend more time investigating grants, loans, and scholarships. Or maybe you'll see places in your monthly spending where you could scale back.
Be sure to root your plan in realistic assumptions as well. For example, how much can you expect to earn on your retirement portfolio each year? How much will a four-year college education cost, on average, by the time your child is ready to enroll? Historical rates are a good starting point for such projections, as are retirement and college savings calculators. In the case of stock market returns, however, past performance may not be indicative of what you can expect in the future. Many analysts—including those at Charles Schwab Investment Advisory—expect much slower growth in the next decade.
It can also be useful to look at different scenarios when making your projections. If you can reach your retirement goal with your current contributions and a 6.5% annual return on your investment portfolio, for example, it might be good to look at how a 5% return would affect your situation. If even a slightly smaller annual return would leave you far short of your goal, you may want to consider upping your savings target to account for that possibility.
3. Stay engaged with your finances all year
Of course, plans don't count for much if you don't stick to them. So, consider creating financial calendar for yourself. This could offer two benefits: It'll keep you engaged with your finances and break your efforts into more manageable tasks spread out across the year. We've broken some of the more common tasks into quarterly chunks to give you an example of how this might work:
- First quarter (January–March)
- Portfolio review. The start of the year is a good time to check on your investment portfolio. Does it have a mix of assets that matches your risk tolerance? If investment gains or losses have caused the portfolio to stray from your intended allocation, bring your portfolio back into balance by selling some assets that have overperformed and using those funds to buy assets that haven't done as well.
- Taxes. If you're self-employed or if your paycheck withholding isn't going to cover all your earnings, incentive pay, and investment income, you should pay taxes on a quarterly basis. These are due on January 15.
- Health care. Funds in your flexible spending account (FSA) are use-it-or-lose-it. You usually have until March 15 to spend unused balances from the previous year, so the start of the first quarter is a good time to check on what's left. Money in a health savings account (HSA), on the other hand, doesn't expire.
- Credit reports. It's important to pay attention to your creditworthiness. You're entitled to a free credit report every year from each of the three big credit reporting companies (Equifax, Experian, and TransUnion), so why not space them out? You should also be watching your credit score regularly, which is easy to do, as many credit card companies now provide free access to scores.
- Second quarter (April–June)
- Taxes. When the second quarter begins, the annual tax filing deadline is usually imminent (April 15).
- Retirement. Tax Day is usually also the last day you can contribute to an individual retirement account (IRA) for the prior tax year. You can contribute up to $6,000, plus an additional $1,000 if you're age 50 or older.
- Insurance. Consider doing a policy checkup. Are your home, auto, and life insurance policies adequate to protect you? Life events such as divorce, marriage, or illness can affect what you need.
- Social Security. It's good to review your Social Security benefits at least once a year, checking for errors but also keeping track of how much you can count on for retirement (which you should include in your financial plan).
- Credit reports. Consider requesting your second credit report.
- Third quarter (July–September)
- Taxes. If you're self-employed or paying estimated taxes for some other reason, look at whether your contributions are on track. You still have time to set aside more so you don't face an ugly surprise at the end of the year.
- Check your progress. Now that half the year is behind you, check your progress toward your goals. If you're falling behind on any of them, revisit your financial plan to see where you might need to adjust.
- Credit reports. Consider requesting your third credit report.
- Fourth quarter (October–December)
- Health care. If you need to make any changes to your FSA or HSA savings or health insurance coverage, you can generally do so during open enrollment periods in late fall. Take this opportunity to reexamine how you're using all these benefits.
- Taxes. Start thinking about any tax-deductible donations you want to make while you still have time to do research and aren't distracted by the holidays. You can also take advantage of tax opportunities before year-end, such as tax-loss harvesting, to manage taxes before year-end.
- Estate planning. If you have a will, check to see if it's up to date. If not, consider getting one. Take the opportunity to also make sure the beneficiaries named on retirement accounts or life insurance are up to date.
Get moral support
Having a plan to refer back to, update, and monitor is the first step toward being a better money manager. Now get some help keeping yourself accountable by telling someone about your goals and plans. Behavioral science research shows we're much better at sticking to our goals when we share our intentions with a relative or friend. Enlisting someone to help hold ourselves accountable.