See Your Resolutions Through with These Resolution Guidelines
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.
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.
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.
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
Resolution #4: Be Prepared for the Unexpected
COVID-19 has been an important reminder that we can never be too prepared for the unexpected. Your financial life can be upended by all kinds of surprises; a global pandemic, a volatile economy, illness, job loss, natural disasters or death. If you’re not properly prepared for what’s to come, make a resolution to get your insurance needs covered. Insurance can be a significant help in protecting you against unforeseen events that don’t happen often but are astronomically expensive when they do. These guidelines can help you prepare yourself for whatever 2021 and beyond may bring:
Protect yourself with health insurance.
The best way to protect against large medical expenses is to purchase health insurance. If you don’t have the option to obtain insurance through your employer, select a health insurance policy that matches your needs. Be sure to look at the coverage, the deductibles, co-payments, and also available medical providers. Should you be in good health and you don’t foresee yourself having to visit a doctor often, consider a high-deductible policy to insure yourself against the possibility of an unexpected health-care tragedy. With a high-deductible policy, you can lower the premium and make pre-tax contributions to a Health Savings Account (HSA) that doesn’t have to be used up each year.
Purchase life insurance to protect any dependents or other liabilities you may have.
When it comes to life insurance, the general guideline is that, if there is someone dependent on your income, you should have a policy in place. If you have large liabilities that will continue after your death for which you can’t self-insure, then you may want to consider additional life insurance. With how unpredictable life is, you’ll want the security of a life insurance policy to ensure your surviving loved one’s needs will be covered. There is an abundance of options out there for you to choose from when it comes to life insurance, so be sure to do your research and talk to experts whom you can trust. Sitting down with a financial advisor could be a useful tool in determining how much insurance you and your family will need for your unique situation. Life insurance policies can be an affordable and efficient way to know that your family will be protected no matter what happens.
Protect your earnings with long-term disability insurance.
It may seem superfluous, but the Council for Disability Awareness reports that nearly one in four workers will be out of work for at least a year due to a disabling condition. That’s a pretty high risk, so it’s smart to cover yourself in case something happens to you. If you can’t get adequate short- and long-term coverage through work, consider looking into an individual policy.
Protect your physical assets with property-causality insurance.
Don’t forget to stay on top of any homeowners or auto insurance policies you may have. Though they may seem arbitrary, an unexpected fire or car crash can eat into your savings significantly if you don’t have protection.
Consider long-term-care insurance.
Covering the cost of elderly healthcare can be a significant financial burden. If you’re looking to protect your children or spouse from having to carry the brunt of that burden, consider purchasing long-term-care insurance. Long-term care is often most cost-effective starting at about age 50 and becomes more expensive or difficult to find the older you get. Establishing a sound retirement savings strategy is another way you can be sure you prepared for long-term care costs. If you want an independent source of information, you can obtain that from your state insurance commissioner.
Create a disaster plan.
Make sure that your homeowner’s or renter’s policy is set to cover any disasters you may encounter. Talk to your agent about flood or earthquake insurance if either is a concern for your area since, generally, neither are automatically included in policies. If you live in a high-risk area or have a lot of valuables, you may also want to keep updated pictures or videos of any valuable household items and possessions along with professional appraisals and estimates of replacement values in a safe place away from your home. 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 that you can grab in a hurry in case you need to evacuate immediately.
Resolution #5: Protect Your Estate
Though it may seem that estate planning is only for the wealthy, it’s actually important for everyone. Having an estate plan established means that, should anything happen, you can be confident in knowing that your wishes were met and your heirs are taken care of. Otherwise, the fate of your assets or minor children may be decided by attorneys and tax agencies. Here’s how to protect your estate and your loved ones:
Review your beneficiaries.
Designating a beneficiary is crucial in making sure that your assets go where you want them to go should anything happen to you and transfer quickly. Make sure to keep information on beneficiaries up to date to ensure the proceeds of life insurance policies and retirement accounts are consistent with your wishes. Note that your will won’t override beneficiary designations.
Write a will.
Your beneficiary designations won’t cover everything, so be sure to write a will, too. When writing a will, it’s best to do so with an experienced lawyer or estate planning attorney. A will can provide more than just directions for transferring assets. It can provide for the support and care of your dependents, as well as layout plans to repay any debts you may still have in your name. It’s important to remember that any beneficiary you’ve designated, or asset titling, will trump whatever is written in your will, so be sure that all asset titling and designated beneficiaries match what you’re putting in your will. You’ll also want to include a trusted and competent confidant that you’re appointing to make decisions on your behalf should you become incapacitated for any reason.
Concluding Thoughts on Financial Resolutions
New year’s resolutions can be the perfect opportunity to bring the change you’ve needed into your life. No matter what your resolutions are, they are only meaningful if you have the discipline to see them through. This is especially true with financial resolutions. Though they can seem overwhelming, it’s important to remember that you don’t have to do everything at once. Improving your financial health happens one step at a time.
We hope these tips will help you begin to scale the mountain towards financial security this year. We’re cheering you on in your journey!