New Year’s Day always seems to bring an air of magic along with it. It’s a new beginning, an opportunity to wipe your slate clean, make big changes, and start fresh. That’s what new year's resolutions are all about. Perhaps you want to work out more or spend less time watching tv and more time reading, or pursue that hobby you’ve always been interested in but never made the time for. Whatever your new year's resolutions are, the magic isn’t in making of the resolution itself, but in sticking to it.

One resolution that you hear often is financial health, and the new year is the perfect chance for people to finally change their money habits and gain a more robust understanding of their personal finances. Financial fitness can be a difficult resolution to stick to and achieve, but these five resolutions can help you increase your financial health today and throughout 2021.

Resolution #1: Create a Budget

 The first step to managing your money like a pro is to set a budget. This is the most crucial step in your journey towards financial security. Take some time to take note of all of your money that is coming in and going out so that you’re able to see your cashflow clearly. Although it’s not as glamorous and exciting as spending, saving and investing your money during your working years should lead to a rising net worth over time, which will enable you to achieve any life goals you may have later in life. Here are some steps that can help you create a well-rounded budget and a solid starting point for increasing your financial health:

Pay yourself first.

A high-level view of your budget requires three things: how much you’re taking in after taxes, how much you’re spending, and how much you’re saving. If you’re unsure of where your money is going, try tracking your spending for 30 days with a spreadsheet or a digital cashflow dashboard such as Mint or Pulse. Once you have a solid idea of where your money is going, determine how much you need to cover your monthly expenses, as well as how much you’d like to put away for other goals you may have. If you’re planning for retirement, it’s recommended that you save 10-15% of your pre-tax income starting as early as your 20’s. After you determine the total amount you’ll need to cover your fixed monthly expenses including housing, food, transportation and health insurance, and any savings goals, consider ways to automatically save that amount by contributing to your 401(k) plan or setting up monthly transfers from checking to a brokerage account. The big thing is that once you commit to an amount, you stick to it. Research shows that saving is easier when you “pay yourself first" so don't let your allocated savings sit in your checking account where It could be spent.

Calculate your net worth annually.

Though this may sound complicated, it doesn’t have to be. Simply add up your assets (everything you own) and subtract your liabilities (anything you owe). This figure is your net worth. It’s important to remember not to panic should your net worth decline during challenging market periods or a volatile economy. What ultimately matters is that there’s a generally upward trend over your earning years. If you’re close to retirement, consider sitting down with a professional and establishing an income and distribution strategy so that you can be confident your net worth will last you as long as possible.

Estimate the cost of essential big-ticket items.

If you have big expenses looming in your future, such as college tuition or buying a house, put money aside and increase your savings sooner rather than later. The best way to honor your savings goals is to consider that money already spent so that you’re not tempted to dip into that money for other expenses. Should you decide to invest those savings, make sure you choose safe investments that are relatively liquid, such as CDs, a high-yield savings account, or money market funds purchased within a brokerage account. If you choose to invest in a CD, remember to make sure the term ends by the time you’ll need that cash. If you have more time, then consider investing in both stocks and bonds inside a brokerage account to increase risk-adjusted return. 

Prepare for emergencies.

After this past year and everything that 2020 brought with it, we know more than ever how important it is to have an emergency fund on hand should something happen. When it comes to “rainy day” fund, the rule of thumb is to have an emergency fund that has three to six months’ worth of your essential living expenses set aside. If you are a single parent with children, consider increasing the emergency fund balance to cover more than nine months of your essential living expenses.  Having this money in an online savings account such as Ally.com earns more interest than a traditional bank savings account. 

SEE ALSO: Resetting Your Financial Goals After COVID-19

Resolution #2: Tackle Your Debt

While debt may not be inherently bad or good, the line separating good debt from bad debt can quickly become blurred and is easily crossed. When handled appropriately, debt can be an excellent tool for your financial security. However, when debt becomes the master of you rather than the other way around, big problems can arise. Here are some tips on how to stay in charge:

Keep it manageable.

The best way to keep your debt at a manageable level is to know what you can borrow versus what you should borrow. We recommend keeping your total monthly debt payments – this includes your credit cards, auto loans, and mortgage payments – below 36% of your pre-taxed income.

Eliminate high-cost, non-deductible consumer debt.

If you can, aim to pay off your credit card debt and try to hold off on borrowing money to buy depreciating assets, such as cars or boats. You should also consider consolidating your debt in a low-rate home equity loan or line of credit (HELOC). If you do so, make sure that you set a realistic budget and have a plan in place for repaying your debt.

Offload your high-interest debt first.

No matter what debts you have, we recommend prioritizing your debts from highest interest rate to lowest interest rate and paying your high-interest rate debts first. That way, you can stop them from accumulating and, consequently, you can save more money.

Resolution #3: Optimize Your Portfolio

 Anyone who chooses to invest their money in the markets does so to get solid investment returns. However, investing your money can be scary, so it may be tempting to try to time your investments, but this is ultimately difficult and counter-productive because of how volatile and unpredictable the markets can be. You’re better off creating a long-term investment plan and practicing discipline when following it. Here are some tips on how to stay focused on the long-term:

Focus, focus, focus. 

First and foremost, you must stay focused on the big picture. Establish a targeted asset allocation - the overall amount of stocks, bonds, and cash that you’re comfortable within your portfolio, even in a down market. Be sure to check that this amount is in sync with your other long-term goals, risk tolerance, and time frame. Remember, the longer your investment timeframe, the more time you’ll have to bounce back from volatility in the markets.

Diversify.

When creating an investment plan for your portfolio, diversification is the most important rule.  Diversification essentially means spreading your assets among different types of investments, like stocks, bonds, ETFs, and mutual funds.  Doing this helps to mitigate risk and provides the potential to improve returns.  To build a diversified portfolio, you look for assets that haven’t historically moved in the same direction at the same time.  That way, if one portion of your portfolio is in decline, the other portions are ideally growing or maintaining wealth. 

Most individual investors do not have the time and expertise to pick individual stocks and bonds, consider using ETFs (exchange-traded funds) or index mutual funds to manage risk while still maintaining exposure to market growth.    

Consider taxes.

When it comes to creating your investment plan, don’t forget to consider which investments are tax-efficient and which are more inefficient. This can help you considerably when it comes time to pay taxes. Place your relatively tax-efficient investments, such as ETF’s or municipal bonds, in taxable accounts and your investments that aren’t so efficient, like real estate investment trusts or mutual funds, in tax-advantaged accounts. Furthermore, if you trade frequently, be sure to do so in tax-advantaged accounts to help reduce your tax bill. Tax-advantaged accounts include accounts such as 401(k), Roth IRA, HSA, or IRA accounts.

Monitor your portfolio.

You should take the time at least twice a year to monitor your portfolio and rebalance it accordingly. Rebalance your portfolio to the target asset allocation by selling the temporary winners and buying the temporary losers.  This disciplined approach can lead to higher gains in the long run, as opposed to investing in the hot stock of the moment. As you look over your portfolio, be sure to remember that your long-term progress is much more important than short-term progress, so don’t make any investment decisions based on short-term results. Also, be sure to reduce your investment risk whenever you begin to approach a big savings goal, such as beginning retirement or paying for college so that you don’t have to sell more volatile investments when you need them most. And always, always remember to keep your emotions out of your investment decisions.

SEE ALSO: Six Tax-Efficient Investing Strategies