January is everyone’s favorite time of year to make resolutions. It’s a perfect time to start fresh, look forward to the new year and improve yourself.
Making financial improvements to your life may be some of the easiest resolutions to keep so long as you do them right. Here are some suggestions to get you down the right path.
5 Simple Resolutions
- Set a goal for your net worth. Figure out what your net worth is right now. It’s a very simple calculation: Subtract your liabilities from your assets. Then, set a reasonable goal for where your net worth should be by December 31, 2015. Saving 15–20% of your income is a standard target, so figure out what that number is and add it to your current net worth. The resulting number should be your end-of-year goal. And if you are investing the savings in the market and all goes well, you should be able to exceed that number. Either way, having this goal in mind will keep you working to save throughout the year.
- Max out your 401(k), 403(b) or other employer-provided retirement plan. No ifs, ands or buts—just do it. You can figure out how to live on the resulting paycheck, and you will thank yourself later. (If you really can’t do this, you should think hard about whether your current standard of living is beyond your means.) As a bonus goal, max out a Roth IRA (or nondeductible traditional IRA if you can’t qualify). Doing both of these might even get you to your net-worth goal without having to think about it.
- Set a budget. No one thinks they need a budget, and yet everyone does. A New Year’s resolution of “spend less money” will get you nowhere unless you know how much less you need to spend and where you can cut that amount from. An online budget tracker like Mint.com (or the one NewFocus uses for our clients) will help you to see where you overspend and what spending categories you can afford to cut back on. And if you are maxing out your retirement plans as above, this can help force you to cut back on anything but necessary spending.
- Maximize your earning potential. Everyone feels that they should be paid what they are worth, but very few find this to be true in their own situation. This year, make it your goal to make more money. If you like your job but feel underpaid, don’t be afraid to ask for a raise. Back up your request with quantitative and/or qualitative reasons why you should be earning more. If you would still be unhappy in your position even if you made more money, perhaps it is time for a new job. Resolve to send out five resumes a month to quality employers that you feel you could form a lasting relationship with. Finally, if the money is great at your current job but you still feel unsatisfied, consider turning one of your passions into a side business. Many people with successful day jobs have found additional fulfillment (and extra spending money) by teaching yoga classes part time, selling handmade crafts on Etsy or pursuing other passions.
- Hire a financial planner. If you are having trouble pursuing the above resolutions by yourself, hire a financial planner. A planner can help you set specific goals and keep you on track to achieving them throughout the year and beyond. Even if you are very competent at saving and budgeting for yourself, a financial planner can help you set the appropriate asset allocation, rebalance your portfolio and implement investment strategies to save you on fees and taxes. Finally, a financial planner can relieve any stress and headache you have around investing by taking it out of your hands and putting it in their control.
Stick to It
Making resolutions is easy, but sticking to them is the hard part. When creating your resolution, make it easier on yourself by being as specific as possible. For example, say, “My resolution is to spend no more than $50 a week on lunch,” instead of “My resolution is to spend less money on food.” Keeping your resolution specific will prevent you from cheating and eventually giving up entirely.
Cheers to a promising new year!
“Everyone feels that they should be paid what they are worth.” Tweet
Disclaimer: Consult your tax advisor before taking any action on topics discussed in the blog.