We know 2020 was a challenging year for so many people impacted by the global pandemic. Still, 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 did you 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 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 check-up to start the year
- Paying down debt, contributing to your retirement plan, and making a budget you can keep are all ways to ring in the new year with better financial health.
Calculate Your Net Worth
If you haven’t done so already, 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 to assessing your financial health and reaching your financial goals.
The resolutions you need to make will become more obvious after making this calculation. Looking closely at all your assets and liabilities helps create a clear picture of where you are prioritizing your current spending and saving and where you need to make changes in your spending and saving habits.
It’s a good idea to recalculate your net worth each year to keep on top of your progress towards your financial goals and correct any mistakes you’re making before they create overwhelming debts.
Reset Your Retirement Savings
If have the opportunity to save for your retirement through a 401(k), 403(b) or 457 plan sponsored by your employer, consider that most people find it easier to max out their retirement contributions by budgeting to contribute a set amount each month.
If you have access to a 401(k), 403(b) or 457 plan at work, consider instructing your employer to withhold enough through salary deferrals to ensure that you reach the maximum limit each year. If you'll be 50 or older by Dec. 31, bump that amount to account for the additional catch-up contributions you're allowed to make. If you are paid on some other frequency, such as weekly or bi-weekly, simply divide the contribution limit by the number of your pay periods for the year.
Are you self-employed? If so, depending on your income, you can contribute to a SEP IRA, profit-sharing plan, or independent 401(k) plan. And if you'll be 50 or older by Dec. 31, 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 is not less than the total amount contributed. Anyone 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 2020 tax year, a modified adjusted gross income (MAGI) of $124,000 to $139,000 for single people ($196,000 to $206,000 for married couples filing jointly) puts you in the phase-out range for being able to contribute to a Roth IRA. For the 2021 tax year, the phase-out range is $125,000 to $140,000 for single filers and $198,000 to $208,000 for married couples.
You should save only amounts that you can realistically afford, as contributing more than you can afford may result in having to incur 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, and if you are like most people, you will spend money that you can easily attain. To help you reach your goal, be sure to transfer amounts earmarked for savings from your checking account to designated separate savings or investment account that is not easily accessed, making it less tempting for you to spend the money that you have managed to save.
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.
And don't forget about 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. Plus, you'll cut down on the number of years 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 underperformed, 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 to add to your savings.
Review Your Credit Report
Make sure 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 you are able to save, as it could result in you paying higher interest rates on loans, which reduces your disposable income.
Review Life Insurance and Disability Insurance Needs
As you move through your career, your life and disability insurance need to continue to change. Give some thought as to how much protection you need and compare it to the coverage 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 you have enough coverage.
The Bottom Line
Be cautious about setting too many or unrealistic financial goals. Otherwise, you may be unable to accomplish any of them. Take this opportunity to restate your financial resolutions simply and clearly for the New Year.
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 one, consider meeting with your financial advisor to review the goals and objectives that you have established.