As we move into the new year, it’s important to reflect on our lives over the past year and find ways we can improve it in the coming year. For many of us, January seems like a reboot–a way to look at our lives with renewed energy and focus.
We all have different lifestyles, different income levels, and various financial goals. But nearly everyone reading this article can share some common resolutions. Building financial freedom is a long process; it’s a marathon, not a sprint. So, while the concept of New Year’s resolutions can be exhilarating, understand that these resolutions must turn into habits if they’re to have any sort of lasting impact on your future.
With that said, here are nine financial New Year’s resolutions for this year.
According to the University of Scranton, about 92% of people who set goals for the new year don’t actually achieve them. To further this, 40% of people who write their goals down don’t even check whether they’ve achieved them.
It’s safe to say we have an issue when it comes to meeting our goals. So what can we do?
First, you need to be realistic about the goals you set. If you have $100,000 in debt and only make $30,000 a year, it’s not realistic to say you are going to pay off all of that debt in a year. It just doesn’t make sense.
Instead, I would suggest developing S.M.A.R.T. financial goals–goals that are specific, measurable, action-oriented, realistic, and time-bound.
After that, let your friends and family members know about your commitments. One study showed that we tend to achieve more when we send commitments to friends versus just writing them down.
Finally, use the power of visualization to help you meet your goals. You can create something called a prosperity picture to help you visually track and achieve your goals. There’s science behind it–it’s crazy. There’s even a full book about it–Picture Your Prosperity.
Once you’ve developed realistic goals and shared them with others, step up your game by visualizing. These actions will help you stay on track the entire year. You may even have a little fun doing it.
Along the same lines as developing realistic goals comes developing a realistic budget. Too many times we open an Excel document and type out all of our expenses, then figure out exactly how much we’re going to spend in each category.
It’s okay, we’ve all done it. The problem with these types of budgets is that they’re not budgeting at all. They’re forecasting. And the moment we blow a category out of the water by spending too much, we quit.
Then there are the categories. Oh, the categories. So many of us are perfectionists and we try to map out every possible category in which we could possibly spend money. Then sub-categories upon sub-categories. By the time you get to actually tracking expenses, you’re exhausted because you don’t know where to categorize. It’s exhausting.
Like YNAB founder Jesse Mecham says in his book, You Need a Budget, we need to keep things simple and budget only the money that we have. And when we screw up–\it’s okay. We just need to roll with the punches.
So instead of crafting a giant forecast of what you may or may not spend each month for the year, create a real budget. Only budget the money you have right now.
When new money comes in, assign it to a category. Keep your categories simple.
Be realistic about it, too. If you value eating fresh, organic produce, you can’t expect to skate by on $50 a week in groceries. You may need to beef up that food budget (yes, pun intended) for the month.
Also, make sure you’re including a savings category in your budget. I’ll talk about automating below, but you won’t be able to achieve any real long-term financial success without the addition of a savings plan.
As a consumer, you’re entitled to a free copy of your credit report, from each of the three major credit reporting agencies, every year.
So if you plan it right, you can get a free copy of your credit report from TransUnion, Equifax, and Experian over the course of the year. Space it out and get one every four months or so, that way you’ll always have a free update on your credit multiple times throughout the year.
An easier way of doing this is by using tools like Credit Karma or Credit Sesame. You can monitor your credit report for free using these tools. (Read more about Quizzle vs. Credit Karma vs. Credit Sesame)
The point here is to get a full run-down of what you owe and where your debt is at. You also want to check in on your credit score and see if you have any negative marks you’re unaware of on your credit report.
While that may not be possible for you, it’s worth a shot to try your own version of a spending fast. Here’s what to do:
- Create a list of needs. List out things you absolutely cannot live without. Think rent, clothes, food, and other necessities.
- Double check your needs. Odds are you listed a few “needs” in step 1 that are more like wants–or at least needs you can live without. Try to get rid of at least one of them.
- List out any extras that you want, but aren’t needs. Consider these “bonuses.”
- Set a goal for what you’ll do with the extra money. Will it be paying off debt? Saving for a home? Whatever it is, write it down.
- Only spend money on things that are listed as needs. You’re entitled to one “want” per month–within reason (i.e., don’t spend $300 on a want–keep it cheap).
- Everything else, dump toward your goal. Whether it’s savings or paying off debt–put every extra dollar you have toward that goal.
This is just an example of how you can do a spending fast. You can modify the “rules” of the game however you want, and for whatever works for you.
The point is–you cut out unnecessary spending and you make it really hard to do. You can do this for a week, a month, or a year. Try something out and see what fits.
Many of you will receive a pay raise this year. Think very critically about how you set aside that money. If you’re fiscally irresponsible and have a tendency to spend, consider an increase in a paycheck withdrawal into a 401(k), health savings account, or IRA.
Up Your Retirement Savings Contribution
According to CNBC, the median savings for all working-age families in the U.S. is only $5,000. It’s time to start increasing your retirement contributions, as much as you might think it’s painful to do. Even if you increase your contributions by 2 or 3 percent, it could mean a big change.
Excluding any type of company match (since I’m assuming you’ve already contributed enough to at least get the match), a 2% increase on a $50,000 salary is an extra $1,000 per year. Over 30 years at a 6% average rate of return, that extra 2% equals about $89,000 down the road. That’s significant for just a $38 addition each bi-weekly paycheck.
Speaking of matching, you should be taking full advantage of your employer’s retirement matching, if they have one. If your employer will match up to a certain percentage of your earnings contributed to your retirement account, make sure you contribute that amount. To do otherwise is basically to short-change yourself out of free money that will be a huge benefit during retirement.
Fully Fund Your IRA
This one is a bigger deal than many folks think. This year, the maximum contribution for those under age 50 is $6,000. Those 50 and over are able to contribute up to $7,000 per year.
Younger readers take note: the dollars you invest today can multiply into thousands thanks to the power of compounded earnings. Experts agree that waiting to start saving for retirement means saving much more in later years to make up for opportunities lost when you were young, so open an IRA account and start saving today.
Increase Other Assets and Cash Flow
Consider other avenues to increase your net worth as well. This might be a time when you need to be proactive about things like a career change, a move to an area with a better cost of living, or looking into side projects that can earn you money.
A lifestyle change might even be in order. Maybe you trade in your luxury car for a cheaper, more reliable vehicle. Perhaps you consider eating out less, or any of the other popular (and sometimes cliché) resolutions. Again, be consistent and deliberate with how you go about this.
These two resolutions can combine into one simple one: increase your net worth this year. The combination of debt and cash flow make up your net worth. While it’s possible to both reduce debt and increase cash flow, if it makes things easier for you, just pick one and focus on that.
If you change nothing with your income but cut your grocery and restaurant bill in half each month, you’ll still be increasing your net worth. And once you feel consistent and in control of that one resolution, you can add more, understanding that you have the willpower and capability to check them off.
This may seem common-sense, but it really is number one: work on reducing or eliminating your debts.
Debt comes in many forms, be that student loans, credit card balances, car payments, or a home mortgage. Conventional wisdom would dictate you focus your efforts on the most damaging debts, like high-interest credit card balances or private student loans. It’s important to understand the massive psychological impacts of carrying debt and the corresponding benefits of reducing it.
Maybe you have a small bill that you’re paying off monthly. It’s not a particularly high-interest rate, and it’s not a large balance, but it annoys you. The satisfaction of having that struck from your balance sheet can have a significant impact on developing healthy financial habits.
No matter how you do it, be consistent about paying down debt. Set up automatic transfers from a checking account, or schedule payments as soon as income hits your wallet. Making one-off payments here and there can be mentally draining and easy to forget or ignore. A consistent cadence, however, can bring peace of mind and a sense of organization and purpose.
David Bach, the author of The Automatic Millionaire, has a simple philosophy for getting rich: Automate.
His basic advice is to automate your savings and live off of everything else. His book supports this philosophy with stories and data, too. He’s the one who originally talked about the “Latte Factor”–meaning a latte every day will add up to a huge amount over time.
But it goes beyond this.
You should be researching major expenses first. Some of these big expenses can be automatic already–and you need to break that habit first.
Everyone thinks of savings as little things we need to go without. “Skip the latte,” conventional wisdom says. If you’re spending $5 each day on a mocha skim frappe, then you might be sabotaging your financial goals.
But, you may be sending more dollars out needlessly each month on larger expenses. This year, make it a point to review what you’re spending on phone, internet, car insurance, life insurance, and other big-ticket items. If you’ve thought about refinancing for a lower interest rate on your home, make this the year you research refinancing to see if it can save you money.
Once you’ve done this, it’s time to automate.
I’m with David Bach in saying you should automate any and everywhere possible. Automate your savings before your bank account even sees it. Set up a direct deposit to a savings account so it’s taken out of your paycheck before it hits your checking.
You should also automate all of your bills. If you’re still paying bills manually online or (I can’t even believe I’m going to say this) still using checks–stop. Automate, automate, automate.
You’ll save time, money, and headaches. And you’ll get rich much quicker.
Learning how to properly invest is a critical skill for financial success. Even if you’re using a robo-advisor that does it for you, you should still have a basic understanding of how the market works and how to look for a particular fund or investment.
But while I’m a huge advocate for robo-advisors (I use one myself), I think a great resolution for 2020 should be to learn how to invest on your own. That way, you’ll at least have the option of choosing an online brokerage and doing some self-guided investing if you want to. If you still want to use a robo-advisor, consider using one in the list below:
|Robo-advisor||Best For||SRI protfolio||Review|
|Ally Invest||No advisory fee, 24/7 call, chat and email support||Yes||Ally Invest Review|
|Personal Capital||High net-worth, access to human advisors||Yes||Personal Capital Review|
|Betterment||Simple platform, competitive pricing||Yes||Betterment Review|
|Wealthsimple||ETF investors||Yes||Wealthsimple Review|
I can’t teach you how to invest in just a short paragraph here, so for starters, check out our guide on how to start investing. It’s a great way to begin to understand the basics. Beyond that, here are a few considerations:
Focus on the Mix of Investments You Have
If you’re just learning to invest, the bulk of your portfolio should be index funds, ETFs, or mutual funds of some sort. If you want to start investing in individual stocks, great, but make sure you have a broad mix of investments first so you’re not putting all your eggs in one basket.
Have an Asset Allocation That Suits You
Going with the point above, not only should you have the right mix of assets, but you should be breaking them up into an asset allocation that makes sense for your level of risk tolerance and your investment horizon. Meaning, if you’re not retiring for 30-40 years, it’s okay to be heavier in stocks, whereas someone who’s five years away from retiring better have a good share of stable investments like bonds.
Start with Tax-Advantaged Accounts
Tax-advantaged accounts include things like a 401k, IRA, 529, HSA, or other retirement accounts. You should consider opening and funding those types of accounts before dumping tons of money into a taxable investment account. Why? Because you’ll not only lower your taxable income (in the case of a 401k or Traditional IRA), but you’ll significantly cut your tax bill and set yourself up for future success (like using a Roth IRA, where you’ll pay no taxes on earnings or withdrawals at retirement time).
Look, it’s not great to think about dying or something else incredibly horrible happening, but that doesn’t mean you shouldn’t prepare for unexpected situations. Here are a few things you should be thinking about:
Select a health insurance plan that matches your needs within areas such as insurance deductibles, coverage, and copays, together with a choice on who your medical providers can be. If you’re in decent health and usually do not go to the doctor (though I’d encourage you to think about changing that mindset!), consider a high-deductible insurance policy to cover against the risk of a serious ailment or even unforeseen health problems.
Find the Cheapest Insurance Quotes in Your Area
Always utilize a group term life insurance plan, whenever it’s provided through your company. These particular plans usually do not require a health care exam and tend to be an affordable way of providing income replacement for your dependents. Beyond that (like if you have sizable obligations that will continue after you die and you can’t self-insure) you may need to have additional life insurance. Unless you have a specific need for a permanent life insurance policy or you have extremely specific requirements, start off with a low-cost term life policy prior to a whole life policy.
Compare Life Insurance: Find the best life insurance rates with Policygenius
Create a Trust and/or Will
If you haven’t already, now is a good time to set up a trust or a will. Again, while we don’t like to think about having to use one, it’s always best to be prepared. These types of documents will protect your family in case something does happen to you. I would recommend looking into Trust & Will–a company that puts together these documents, among many others, on your behalf at a super-low cost.
Read More: Best Online Will Maker
Now that you’ve started to think about your financial resolutions for the new year, it’s time to accelerate the process by using some tools to help you along the way. Here are our favorites:
If your resolution involves anything about money, then Mint should be your number one tool. Mint is a free online money management tool that brings together all your financial accounts in one place. With Mint, you can monitor multiple accounts like checking, savings, investments, retirement, and credit cards. You can also set and track goals (perfect for a New Year’s resolution) about everything from paying off that balance transfer credit card to buying a home.
With Mint, you can quickly view your entire financial portfolio with just a few clicks. You can see all your balances and transactions from your computer or from your smartphone. All your accounts will be pulled into Mint and updated automatically. You can set up a budget, elect to receive bill reminders, make goals, and receive free savings advice.
And while we’re on the subject of money, you can also automate your investing with a tool like Betterment. Ideal for those wanting to invest money each month, Betterment gives you access to an array of ETFs that instantly diversifies your portfolio. Betterment is extremely easy to use (I have an account), and you can track your Betterment investments from Mint.
2. Joe’s Goals
Joe’s Goals is an online goal tracker that helps users develop good habits. This is a simple tool to use and is designed like a calendar. You just set up your goals and then track them on a daily basis. A daily score is automatically calculated for you so you know how you are doing.
With this tool you don’t just track the positive, you also track the negatives that are keeping you from accomplishing your goals. The negative goals are things you want to get rid of or habits you want to break. For example, if you have a goal of eating out less, but you give in and you eat out, you track this with a negative mark. Your negative marks are visible along with your positive marks and are calculated into your daily score giving you an overall picture of how you did on any given day.
Coach.me has two features that will help you develop new habits and keep your goals. The first is their app. It’s pretty straightforward in that you create a habit or a goal and track it every day (or whatever frequency you choose). Each time you meet your milestones, you can get “high fives” from friends, family, or the broader Coach.me community. One user said the following about the app:
“Coach.me helps me change my life, step by step. Every release gets me more excited about how good it is at providing accountability, community, and motivation for my goals. It helps me to consciously learn and grow every single day.”
You can also get habit coaching for as little as $15 per week. According to their website, “over 700 coaches are ready to help,” and you can “message your coach through our app or arrange a phone consultation.”
Earlier, I mentioned the benefit of using S.M.A.R.T. goals for your financial resolutions. Strides is an app that uses that methodology and lets you track goals as well as habits you want to form. One of the things I love is the ability to break your goals down into smaller pieces. Sometimes our goals (i.e., paying off $100,000 in debt) are a little lofty–so it’s nice to break it up into smaller chunks.
Financial planning isn’t particularly difficult on a personal level. A budget can be drawn up with little effort, and you can gather a snapshot of your financial state reasonably quickly. Taking a look at credit card statements, paycheck stubs, and receipts can help you understand the money you’re bringing in and where it’s going. At its most basic level, a financial plan can merely be a budget, so long as you stick to it.
So, if you don’t have a budget, start there. Define as many categories as you feel necessary to portray where you spend your money accurately. Then, understand how much money you pocket each month, and where that money ends up going. Finally, establish your spending limits in each of those categories, so that the amount of income you earn each month is less than what you spend. Now comes the hard part: sticking to those numbers over the next week, month, year, and decade.
Inevitably, the hope is that your budget evolves, enabling you to direct your income to other areas. Your plan will regularly need refining. The worst thing you can do is to make lifestyle changes that increase frivolous spending.
Look at, and really evaluate, the resolutions above: to reduce your debt and increase your assets. Are you debt-free? Are you maxing out a 401(k)? How about an IRA, or maybe an HSA if you’ve got one? If you have kids, are you contributing to a college savings plan, or are you otherwise setting aside money for their future?
No, this year might not be the year that you reach the summit, achieving “financial freedom.” Building wealth takes time, patience, and effort. It starts with laying the proper foundation, taking those first steps, and then following through.
At face value, these resolutions seem simple… perhaps even too easy. However, the most straightforward resolutions can often be the most difficult to achieve. Start here, building the basic habits that will follow you throughout the years. You’ll be glad you did. I hope you’ll join me and many others who are looking to lead a fulfilling life, financially and personally. Here’s to health, wealth, and happiness in the new year!
What other financial resolutions will you shoot for this year?