It is important for everyone to reset their personal finances and their goals for the New Year.
Did you make any resolutions concerning your personal finances last January? If so, how did you do? Did you attain your goals or miss the mark? While the days leading up to New Year’s Eve are often spent reflecting on the year gone by, the following days should be spent reflecting on the New Year, reviewing your financial scorecard for the past year, and then looking for ways to improve.
The good news about New Year’s resolutions is that you get a fresh crack at them each year. Here are some financial changes that you should resolve to make in the year to come.
- New Year’s resolutions are often broken, but try to keep your financial ones.
- Give yourself a financial checkup to start the year.
- Paying down debt, contributing to your retirement plan, and making a budget that you can keep can all help you ring in the New Year with better financial health.
Calculate Your Net Worth
If you haven’t already done so, the New Year is as good a time as any to determine what you’re worth financially. Calculating your net worth is a key step in assessing your financial health and reaching your financial goals.
The resolutions that you need to make will become more obvious after making this calculation. Looking closely at all your assets and liabilities helps to create a clear picture of where you are prioritizing your current spending and saving and where you need to make changes in those habits.
It’s a good idea to recalculate your net worth each year. Doing so can help you keep on top of your progress toward your financial goals and correct any mistakes that you’re making before they create overwhelming debts.
Reset Your Retirement Savings
If you have the opportunity to save for your retirement through a 401(k), 403(b), or 457 plan sponsored by your employer, consider budgeting so you can contribute a set amount each month toward your retirement savings. Most people find it easier to max out their retirement contributions that way.
If you have access to a 401(k), 403(b), or 457 plan at work, then consider instructing your employer to withhold enough through salary deferrals to ensure that you reach the maximum limit each year. If you’ll be age 50 or older by Dec. 31, then bump up that amount to account for the additional catch-up contributions that you’re allowed to make. If you are paid on some other frequency, such as weekly or biweekly, then simply divide the contribution limit by your number of pay periods for the year.
Are you self-employed? If so, depending on your income, you can contribute to a SEP individual retirement account (SEP IRA), profit-sharing plan, or independent 401(k) plan. And if you’ll be age 50 or older by Dec. 31, then the contribution limit jumps for independent 401(k)s, helping you save even more.
Even if you’re covered under a retirement plan at work, you and your spouse can each contribute to a traditional IRA or Roth IRA, as long as your combined taxable wages and net self-employment income are not less than the total amount contributed. Anyone age 50 or older can contribute an extra $1,000, increasing the total allowable contribution to $7,000, or $583.33 per month.
Keep in mind, however, that for the 2021 tax year, a modified adjusted gross income (MAGI) of $125,000 to $140,000 for single filers (rising to a range of $129,000 to $144,000 in 2022), and $198,000 to $208,000 for married couples filing jointly (rising to a range of $204,000 to $214,000 in 2022), puts you in the phase-out range for being able to contribute to a Roth IRA. There also may be limits on how much of your traditional IRA you are allowed to deduct.
You should save only amounts that you can realistically afford, since contributing more than that may result in incurring debts to cover everyday expenses. To determine how much you can save each period, incorporate your retirement savings into your regular budget.
Update Your Goals
Creating easy access to your funds can be quite tempting, although there's the risk that, if you are like most people, you will spend money that you can get to easily. To help you reach your goals, be sure to transfer amounts earmarked for savings from your checking account to a designated separate savings or investment account, or better yet, have a set amount from your paycheck auto-deposited into savings. That will make it less tempting for you to spend the money that you have managed to set aside.
Make a Plan to Pay Down Debts
Take a few minutes now to set new savings goals for the New Year, including how much you would like to add to your retirement nest egg, your children’s education fund, or the down payment on a home. You should also reset how much you plan to pay on your personal loans, debts, and home mortgage accounts.
Consider paying some extra principal toward your mortgage payment each month. By doing so, you’ll earn a risk-free return on that money equal to your mortgage interest rate and cut down on the number of years that it will take to pay off your mortgage. However, if you must choose between adding to your retirement nest egg and paying extra on your mortgage, talk to your financial advisor to determine which option is more suitable for you.
Rebalance Your Portfolio
The previous year was no different from any other year: Some sectors overperformed, and some sectors underperformed. Chances are that the sectors that did the best last year may not enjoy a repeat performance this year. By rebalancing your portfolio to its original or updated asset allocation, you take steps to lock in gains from the sectors with the best returns and purchase shares in the sectors that have lagged behind last year’s leaders.
Pay Down Your Credit Cards
If you owe money on your credit cards, determine how much you can realistically afford to pay off during the year. For best results, try not to charge additional purchases on those cards while you’re trying to pay down what you owe. If you have high-interest credit card balances, consider whether it would be more beneficial to pay off those high-interest debts or add to your savings.
Review Your Credit Report
Make sure that you check your credit report regularly, and take steps to repair any negative aspects. Now that you’re entitled to three free credit reports each year, there is no excuse for not reviewing what is one of your most important financial reports, especially since errors in these reports are not uncommon.
It’s easy to keep tabs on your credit report, whether that’s getting one free copy a year from the three reporting agencies, or reviewing your history through any number of free credit monitoring sites.
A poor credit report could adversely affect the amount that you are able to save, as it could result in your paying higher interest rates on loans, thus reducing your disposable income.
Review Life Insurance and Disability Insurance Needs
As you move through your career, your life insurance and disability insurance needs will continue to change. Give some thought as to how much protection you need, and compare it to the coverage that you currently have through your employer’s benefits package.
Consider whether you need more or less life insurance and whether your needs would be better satisfied by term or permanent life insurance. Also, review your disability insurance coverage to determine whether the amount you have is adequate.
How Do You Maintain Financial Resolutions?
The key is to set realistic targets and remind yourself why you made the resolution when you’re tempted to give it up. Transferring money from your checking account to a designated separate savings or investment account that’s not easily accessible or having part of your paycheck automatically deposited in a savings account can also help to remove any temptation.
How Much Money Can I Put Money Aside Each Month?
That depends on your individual circumstances. Once you work out how much you have coming in and review your spending habits and debts, it should become clearer how much you can reasonably set aside.
Some expenses, like a mortgage and utilities, don't allow for wiggle room, but there may be some room to cut down on others and allocate that money elsewhere. Generally speaking, financial experts recommend saving at least 20% of your income each month.
What Is the 50-20-30 Budget Rule?
The 50-20-30 budget rule is a simple template designed to help people reach their financial goals. Senator Elizabeth Warren (D-Mass.) popularized the 50-20-30 budget rule in her book "All Your Worth: The Ultimate Lifetime Money Plan." According to this rule, 50% of your income should be spent on essentials, 20% should be saved, and the remaining 30% allocated to discretionary, non-essential purchases, or "wants."
The Bottom Line
Take this opportunity to restate your financial resolutions simply and clearly for the New Year. Be cautious about setting too many or unrealistic financial goals. Otherwise, you may be unable to accomplish any of them.
It may be a good idea to maintain a checklist to keep track of how you are doing throughout the year, so that you can make any necessary modifications. If you have a financial advisor, consider meeting with them to review the goals and objectives that you have established.