New Year's Financial Resolutions

September 27, 2023 Rob Williams Advanced • Beginner
Here are five steps we encourage all investors to consider taking to help boost their financial fitness at any time of the year.

Are you the kind of person who makes resolutions on New Year's Day? Here are five steps we encourage all investors to consider taking to boost their financial fitness at any time of the year. Why not resolve to take them now? 

Resolution 1: Create a budget

Committing to a saving and investing program during your working years is generally the best way to boost your net worth and help achieve many of life's most important goals. Of course, first you'll need to know how much money you've got to work with. That's where a budget and net worth statement can help. Here's how to think about them.

  • Budget and save. At a minimum, be sure to have a high-level budget with three things: how much you're taking in after taxes, how much you're spending, and how much you're saving. If you're not sure where your money is going, track your spending using a spreadsheet or an online budgeting tool for 30 days. Determine how much money you need to cover your fixed monthly expenses, such as your rent or mortgage and other living expenses, and how much you'd like to put away for other goals. For retirement, we suggest saving 10% – 15% of pre-tax income, including any match from an employer, starting in your 20s. If you delay, the amount you may need to save goes up. Add 10% for every decade you delay saving for retirement. Once you commit to an amount, consider ways you can save automatically, such as through monthly direct deposits. 
  • Calculate your personal net worth annually. It doesn't have to be complicated. Make a list of your assets (what you own) and your liabilities (what you owe). Subtract the liabilities from the assets to determine your net worth. Don't panic if your net worth declines when the market is struggling. What's important is to see a general upward trend over your earning years. If you're retired, you'll want to plan an income and distribution strategy to help make your savings last as long as necessary and support other objectives.
  • Project the cost of essential big-ticket items. If you have a big expense in the near term, like college tuition or roof repair, put the money aside or increase your savings and treat that money as spent. If you know you'll need the money within a few years, keep it in relatively liquid, safe investments like short-term certificates of deposit (CDs), a savings account, or money market funds purchased within a brokerage account. If you choose to invest in a CD, make sure the term ends by the time you need the cash. If you have more than a few years, invest wisely, based on your time horizon.
  • Prepare for emergencies. If you aren't retired, consider creating an emergency fund with three to six months' worth of essential living expenses set aside in a savings account. The emergency fund can help you cover unexpected but necessary expenses without having to sell more volatile investments.
  • Retired? Invest your living-expense money conservatively. Consider keeping 12 months of living expenses—after accounting for non-portfolio income sources like Social Security or a pension—in cash, an interest-bearing savings account, or a money market fund. Then consider keeping another two to four years' worth of spending laddered in short-term bonds or individual CDs or invested in short-term bond funds as part of your portfolio's fixed income allocation. You can use this money to cover expenses in the near term. Having a chunk of savings invested conservatively should allow you to invest a portion of your remaining savings for potential growth, at a level of risk appropriate for you, while reducing the chances you'll be forced to sell more volatile investments (like stocks) in a down market.

Resolution 2: Manage your debt

Debt is neither inherently good nor bad—it's simply a tool. It all depends on how you use it. For most people, some level of debt is a practical necessity, especially to purchase an expensive long-term asset to pay back over time, such as a home. However, problems arise when debt becomes more of a burden than a tool. Here's how to stay in control.

  • Keep your total debt load manageable. Don't confuse what you can borrow with what you should borrow. Keep the monthly costs of owning a home (principal, interest, taxes, and insurance) below 28% of your pre-tax income, and your total monthly debt payments (including credit cards, auto loans, and mortgage payments) below 36% of your pre-tax income.
  • Eliminate high-cost, non-deductible consumer debt. Try to pay off credit-card debt and avoid borrowing to buy depreciating assets, such as cars. The cost of consumer debt adds up quickly if you carry a balance. Consider consolidating your debt in a low-rate home equity loan or line of credit, setting a realistic budget, and implementing a schedule to pay it back.
  • Match repayment terms to your time horizons. If you're likely to move within five to seven years, you could consider a shorter-maturity loan or an adjustable-rate mortgage (ARM), depending on current mortgage rates and options. Don't consider this if you think you may live in your home for longer or struggle to manage mortgage payment resets if interest rates or your plans change. We also don't suggest that you borrow money under the assumption that your home will automatically increase in value. Historically, long-term home appreciation has significantly lagged the total return of a diversified stock portfolio. And, for any type of debt, have a disciplined payback schedule. Create a plan to pay off the mortgage on your primary home before you plan to retire.

Resolution 3: Optimize your portfolio

We all share the goal of getting better investment results. But research shows it's extremely difficult to always invest at the "perfect" time. So, create a plan that will help you stay disciplined in all kinds of markets. Follow your plan and adjust it as needed. Here are ideas to help you stay focused on your goals.

  • Focus on your overall investment mix. After committing to a savings plan, how you invest is your next most important decision. Have a targeted asset allocation—that is, a strategically proportioned mix of stocks, bonds, and cash in your portfolio—that you're comfortable with, even in a down market. Make sure it fits your long-term goals, risk tolerance, and time frame. The longer your time horizon, the more time you'll have to potentially benefit from up or down markets.
  • Diversify across and within asset classes. Diversification can help reduce risk and can be a critical factor in helping you reach your goals. Mutual funds and exchange-traded funds (ETFs) are great ways to own a diversified basket of securities in just about any asset class.
  • Consider taxes. Place relatively tax-efficient investments, like ETFs and municipal bonds, in taxable accounts and relatively tax-inefficient investments, like mutual funds and real estate investment trusts (REITs), in tax-advantaged accounts. Tax-advantaged accounts include retirement accounts, such as a traditional or Roth individual retirement account (IRA). If you trade frequently, do so in tax-advantaged accounts to help reduce your tax bill.
  • Monitor and rebalance your portfolio as needed. Evaluate your portfolio's performance at least twice a year using a benchmark that makes sense for you. Remember, the long-term progress you make toward your goals is more important than short-term portfolio performance. As you approach a savings goal, such as the beginning of a child's education or your retirement, begin to reduce investment risk, if appropriate, so you don't have to sell more volatile investments, such as stocks, when you need them. 
  • Choose appropriate benchmarks. Lastly, your benchmark to measure investment performance should match your portfolio and your goals. Don't be tempted to compare your portfolio to what performed best in the market last year or even a portfolio invested 100% in stocks. You should have a portfolio selected to best meet your goals, with an appropriate balance of potential return and risk as well. Progress toward your goals is more important than picking the top-performing stocks each year—which, for any investor, isn't possible to predict.

Resolution 4: Prepare for the unexpected

Risk is a part of life, particularly in investments and finance. Your financial life can be upended by all kinds of surprises—illness, job loss, disability, death, natural disasters, or lawsuits. If you don't have enough assets to self-insure against major risks, make a resolution to get your insurance needs covered. Insurance helps protect against unforeseen events that don't happen often but are expensive to manage yourself when they do. The following guidelines can help you prepare for life's unexpected moments.

  • Protect against large medical expenses with health insurance. Select a health insurance plan that matches your needs in areas like medical and drug coverage, deductibles, co-payments, and choice of medical providers. If you're in good health and don't visit the doctor often, consider a high-deductible plan to insure against the possibility of a serious illness or unexpected health-care event.
  • Purchase life insurance if you have dependents or other obligations. First, take advantage of a group term insurance policy, if offered by your employer. Such programs don't generally require a medical exam and can be a cost-effective way to provide income replacement for dependents. If you have minor children or large liabilities that will continue after your death for which you can't self-insure, you may need additional life insurance. Unless you have a permanent life insurance need or special circumstances, consider starting with a low-cost term life policy before a whole life policy.
  • Protect your earning power with long-term disability insurance. The odds of becoming disabled are greater than the odds of dying young. According to the Social Security Administration, a 20-year-old American has a 25% chance of becoming disabled before normal retirement age and a 13% chance of dying before retirement age.1 If you can't get adequate short- and long-term coverage through work, consider an individual policy.
  • Protect your physical assets with property-casualty insurance. Check your homeowner's or renter's and auto insurance policies to make sure your coverage and deductibles are still right for you.
  • Obtain additional liability coverage, if needed. A personal liability "umbrella" policy is a cost-effective way to increase your liability coverage by $1 million or more in case you're at fault in an accident or someone is injured on your property. Umbrella policies don't cover business-related liabilities, so make sure your business is also properly insured, especially if you're in a profession with unique risks and aren't covered by an employer.
  • Consider the pros and cons of long-term-care insurance. If you're considering a long-term-care policy, look for a policy that provides the right type of care and is guaranteed renewable with locked-in premium rates. Long-term care insurance typically is most cost-effective starting at about age 50 and generally becomes more expensive or difficult to find after age 70. You can get independent sources of information from your state insurance commissioner. A sound retirement savings strategy is another way to plan for long-term-care costs.
  • Create a disaster plan for your safety and peace of mind. Review your homeowner's or renter's policy to see what's covered and what's not. Talk to your agent about flood or earthquake insurance if either is a concern for your area. Generally, neither is included in most homeowner's policies. Keep an updated video inventory of valuable household items and possessions along with any professional appraisals and estimates of replacement values in a safe place away from your home.

Consider storing inventories and important documents on a portable hard drive. It's also a good idea to have copies of birth certificates, passports, wills, trust documents, records of home improvements, and insurance policies in a small, secure evacuation box (the fireproof, waterproof kind you can lock is best) that you can grab in a hurry in case you have to evacuate immediately. Make sure your trusted loved ones know about this file as well, in case they need it.

Resolution 5: Protect your estate

An estate plan may seem like something only for the wealthy. But there are simple steps everyone should take. Without proper beneficiary designations, a will, and other basic steps, the fate of your assets or minor children may be decided by attorneys and tax agencies. Taxes and attorney fees can eat away at these assets and delay their distribution just when your heirs need them most. Here's how to protect your estate—and your loved ones.

  • Review your beneficiaries, especially for retirement accounts, annuities, and life insurance. The beneficiary designation is your first line of defense to make your wishes for assets known and ensure that they transfer to who you want quickly. Keep information on beneficiaries up to date to ensure the proceeds of life insurance policies and retirement accounts are consistent with your wishes, your will, and other documents.
  • Update or prepare your will. A will isn't just about transferring assets; it can provide for your dependents' support and care and help avoid the costs and delays associated with dying without one. It can also spell out plans to repay debts, such as a credit card or mortgage. Keep in mind, a beneficiary designation or asset titling trumps what's written in a will, so make sure all documents are consistent and reflect your desires. When writing a will, we recommend working with an experienced lawyer or estate planning attorney.
  • Coordinate asset titling with the rest of your estate plan. The titling of your property and non-retirement accounts can affect the ultimate disposition and taxation of your assets. Talk with an estate attorney or lawyer about debts and the titling of assets, such as a home, that don't have a beneficiary designation to make sure they reflect your wishes and are consistent with titling laws that can vary by state.
  • Have in place durable powers of attorney for health care. In these documents, appoint trusted and competent confidants to make decisions on your behalf if you become incapacitated.
  • Consider a revocable living trust. This is especially important if your estate is large and complex and you want to spell out how your assets should be used in detail, or if you have dependent children and want to detail how assets should be managed to support them, who will manage the assets, and other issues. A living trust may not be needed for smaller estates where beneficiaries, titling, and a will can suffice, but talk with a qualified financial planner or attorney to be sure.
  • Take care of important estate documents. Make sure a trusted and competent family member or close friend knows the location of your important estate documents.

Finally, remember you don't have to do everything at once. There's a lot you can do to improve your financial health by taking one step at a time and think of these resolutions as a checklist. Then use the checklist to make some real progress on your journey this year. 

1Johanna Maleh and Tiffany Bosley. "Disability and Death Probability Tables for Insured Workers Who Attain Age 20 in 2023." Social Security Administration, July 2023.

Are you on track to reach your goals?

What Should You Do with Your Employee Stock?

Whether it's stock options, restricted stock units, an employee stock purchase plan, or some other form of equity compensation, many companies offer this vital benefit to employees. But once you have it, what should you do with it?

Common Trading Mistakes to Avoid

Is something getting in the way of your trading? It might be your own tendencies. We discuss 5 common trading blunders to avoid.

8 Mistakes to Avoid When Planning for College Costs

These planning mistakes could potentially cost you thousands in lost student aid and raise your out-of-pocket expenses.

Investors should consider carefully information contained in the prospectus, or if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling 800-435-4000. Please read the prospectus carefully before investing.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. Supporting documentation for any claims or statistical information is available upon request.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.

Rebalancing does not protect against losses or guarantee that an investor's goal will be met. Rebalancing may cause investors to incur transaction costs, and when rebalancing a non-retirement account, taxable events can be created that may affect your tax liability.

Investing involves risk including loss of principal.

Home equity lines have a 10‐year draw period followed by a 20‐year repayment period. During the draw period, monthly payments of accrued interest are required. Payments will increase if rates increase. At the end of the draw period, your required monthly payments will increase because you will be paying both principal and interest. You may not use this home equity line as a bridge loan, for commercial purposes, to invest in securities, or to repay a margin loan.

Diversification and asset allocation strategies do not ensure a profit and do not protect against losses in declining markets.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.

A bond ladder, depending on the types and amount of securities within the ladder, may not ensure adequate diversification of your investment portfolio. This potential lack of diversification may result in heightened volatility of the value of your portfolio.  As compared to other fixed income products and strategies, engaging in a bond ladder strategy may potentially result in future reinvestment at lower interest rates and may necessitate higher minimum investments to maintain cost-effectiveness. Evaluate whether a bond ladder and the securities held within it are consistent with your investment objective, risk tolerance and financial circumstances.

Risks of the REITs are similar to those associated with direct ownership of real estate, such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and credit worthiness of the issuer.

Tax‐exempt bonds are not necessarily a suitable investment for all persons. Information related to a security's tax‐exempt status (federal and in‐state) is obtained from third parties, and Schwab does not guarantee its accuracy. Tax‐exempt income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.

Brokerage and Insurance products: ‐ Are not deposits ‐ Are not FDIC insured ‐ Are not insured by any federal government agency ‐ Are not guaranteed by the bank or any affiliate of the bank ‐ May lose value.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

0923-3C53