RESOLVE TO SET YOURSELF UP FOR FINANCIAL SUCCESS IN THE NEW YEAR
Making New Year’s resolutions is common but sticking to them isn’t easy. If you’re interested in tackling your financial fitness in 2020, read on for five suggested resolutions to tackle throughout the year.
Create Your Budget Roadmap
From a big picture standpoint, finances are all about how much money is coming in and how much is flowing back out. Creating a personalized budget roadmap can help you visualize your long-term goals and assess whether you’re making progress year to year. Here’s how to get started:
- Create a realistic budget you can stick to. There are lots of user-friendly budgeting apps available to assist you, so you don’t have to worry about getting bogged down with maintaining a spreadsheet. If you’re not into tracking the minutiae, keep it high-level by simply tracking how much you earn each month after taxes, how much you’re spending overall each month and how much you’re putting into savings. Your monthly budget doesn’t have to follow any rules – just make sure it works for you.
- Always pay yourself first. You’ve done the work to know how much your fixed monthly expenses cost, so now you can determine how much you’re able to save each month. Putting away 10-15% of pre-tax income is a great place to start, but anything is better than nothing. Choose an amount and commit to it, then automate your savings so that you’re paying yourself first each month.
- Calculate your net worth each year. Some people skip this step because they assume it’s complicated, but it’s a very doable exercise and integral to ensuring you stay on track to reach your retirement goals. Make a list of the things you own (your assets) and then subtract what you owe (your liabilities). Look for an increase in your net worth year over year, but don’t panic if there are dips during tough market periods. The important thing is to maintain a generally upward trend over time.
- Plan for big-ticket items. If you know there’s a big expense coming, like college tuition or a new roof, increase the amount you typically save and treat it like money already spent. This way, you can avoid taking on new debt. If you’ll need the money in just a few years, you’re wise to keep it liquid in safe, short-term investments like certificates of deposit (CDs) or a high-yield savings account. If the expense is further off in the future, this money might be a candidate for longer-term investments such as stocks.
- Maintain an emergency fund. Conventional wisdom is to save up three to six months of living expenses in a savings account you keep separate from your other funds. If that prospect feels daunting, concentrate on saving just a thousand dollars first. Once you reach that milestone, set your sites on another manageable goal.
Manage Any Debt
The term “debt” has a negative connotation for most people, but remember that debt can be a tool to help you accomplish your goals. For most people, taking on debt is a necessity for buying a home, for example. It only becomes problematic when your debt begins to control you, rather than the other way around. These tips will help you keep the upper hand:
- Know your total debt – and keep it manageable. Many people get tripped up in what they can borrow, as opposed to what they should When it comes to home purchases, it’s smart to keep your total monthly mortgage, taxes and insurance costs below 28% of your pre-tax income. Overall, you want your total monthly debt payments to be below 36% at a minimum.
- Pay down high-interest consumer debt. If you have credit card debt or you’ve borrowed to purchase a depreciating asset, like a car, make it your goal to pay these debts off first. Consumer debt can add up quickly – and easily get out of hand – so have a plan and a schedule to pay it off as quickly as you’re able.
Be Discipled with Your Portfolio
The market is likely to go from bull to bear frequently in your investment lifetime. Avoid changing your strategy with the tides, as this could end up being counterproductive. Instead, optimize your portfolio based on your own plans, and adjust it as needed to stay on track for your financial goals. Here are a few ways to do so:
- Focus on your overall investment mix. You’ve committed to a savings plan, and now you need to determine where that money will go. Get strategic about your asset allocation – your overall mix of cash, stocks or bonds – and align your risk with your age and future goals. Once you’ve determined your optimal mix, stay disciplined during market volatility, knowing you have a long-term strategy in place.
- Diversify. Sure, you’ve heard this advice before, but that’s because diversification is crucial to reducing your overall risk and helping you meet your money goals. An easy way to accomplish a diversified portfolio is to invest in mutual funds and exchange-traded assets (ETFs).
- Be tax efficient. Put your tax-efficient investments, like municipal bonds or ETFs, in taxable accounts. Conversely, you want your tax-inefficient investments like mutual funds in tax-advantaged accounts. These include traditional and Roth IRAs. Taking these steps will help you reduce your tax bill.
Expect the Unexpected
Even the best financial planning can be upended by surprises in life. Whether it takes the form of a job loss, illness, lawsuit or natural disaster, you need to have a plan in place for surviving a major financial obstacle. If you don’t have enough assets to self-insure against great financial risk, resolve to protect yourself with insurance. Here are a few helpful guidelines:
- Maintain health insurance to protect against big medical expenses. Even if you’re in good health, having insurance protects you against unexpected injury or illness. There are many types of plans available, so look for one that meets your particular needs in coverage, deductibles, and copayments.
- Purchase life insurance to protect your dependents. If you have a spouse or children who depend on you financially, life insurance is a must-have. If your employer offers group term life insurance, make sure to take advantage of it – these policies are usually very cost-effective and typically don’t require a medical exam. If you need additional life insurance, consider a private term policy. You may be surprised at how affordable they can be, even if you are aging or not in perfect health.
- Take out disability insurance to protect your earning power. According to the Social Security Administration, the odds of becoming disabled are greater than the odds of dying young. In fact, someone who turned 20 years old in 2019 has a 19% chance of becoming disabled prior to retirement and just a 3% chance of dying in that same timeframe. You may have short- or long-term disability coverage available through your employer, but you could purchase an individual policy, too.
- Consider purchasing long-term care insurance. Here’s a startling statistic: According to the U.S Department of Health and Human Services, the typical 65-year-old has a 52% chance of needing long-term care at some point. As you may know, however, these policies can be very expensive. If you think it’s the right move for you, a financial advisor can provide unbiased sources of information to help you choose a policy that fits your needs.
Create an Estate Plan
If you think estate planning is only for the wealthy, think again. Everyone should take a few simple steps to protect their estate – and their loved ones – so that the fate of hard-earned assets isn’t left to third parties like attorneys or tax agencies upon death. If you haven’t done so yet, here’s how to get started with estate planning:
- Designate beneficiaries for retirement accounts, life insurance policies and annuities. This is the easiest way to make your wishes known and to ensure an asset can transfer quickly to your designated heirs. It’s not a one-and-done transaction, however. You should review beneficiaries annually and make changes as life events may require.
- Prepare a will and keep it updated. When you die without a will, there are innumerable delays and financial costs associated with distributing your assets. Protect your loved ones from this fate by spelling out who should receive your assets, plans to repay any remaining debts and special considerations for your dependents’ support and care. (Note: Beneficiary designations will trump what’s written in a will, so make sure you update beneficiary selections if they differ from your intentions.) An experienced estate planning attorney can be helpful in writing a will and including all the necessary details. Make sure your heirs know where to find your estate documents once they are finalized.
- Appoint a healthcare power of attorney. An important inclusion in your will is who will make financial decisions on your behalf if you become medically incapacitated and unable to do so yourself. This person should be a trusted and competent confidant, and they need not be a family member.
- Create a revocable living trust if your estate is complex. If you have a lot of assets or very specific wishes about how each is distributed, consider utilizing this tool to spell out every detail that’s important to you. It may be a useful addition to your will and beneficiaries in certain circumstances. An attorney or financial planner can help you make this determination.
The above list may seem intimidating, but each of these resolutions will bring you one step closer to financial fitness in 2020. Remember, you don’t have to do it all at once, so take things one step at a time and you’re sure to see important progress in your financial health by the year’s end. Good luck!
Securities offered through Triad Advisors, LLC, member FINRA/SPIC. Advisory services offered through TriCapital Wealth Management, Inc. TriCapital Wealth Management, Inc. is not affiliated with Triad Advisors, LLC.