New Year’s Financial Resolutions
With the New Year rapidly approaching, many take this time to reexamine and reprioritize every aspect of their life, including their finances. The end of the year is a great time to reflect on everything you’re doing right and how you’d like to improve. Many of us make New Year’s resolutions, vowing to change our behavior for the better. If you start meaningful financial habits, you will be one step closer to achieving financial health. If you’re looking to improve your finances, add these New Year’s financial resolutions to your list.
Create a Budget
Creating and maintaining a budget is one of the best ways to reach your financial goals. Regardless of your financial situation, you can use this method to track your spending and save for the future. A budget can help you to get out of debt, build your nest egg or save for one of life's most important purchases, such as a new home or wedding.
To get started, add up all your income for the month, including your regular paycheck, any interest accrued on your savings, as well as earnings from odd jobs or your side hustle. If you are a freelancer with unpredictable income, add up your total earnings for the year and divide that number by 12.
Next, deduct all your regular expenses from your monthly earnings, including rent or your mortgage, transportation, car payment, healthcare, insurance, student loans, food, utilities, as well as any automatic deductions for subscriptions or other fees. See how much money you have leftover.
Now it’s time to start organizing your spending. You can use the 50-30-20 model, which means spending 50% of your earnings on your needs, including food and housing, 30% on your wants, such as entertainment or eating out, and 20% on paying off your debts or saving for the future.
These percentages are not set in stone; they are simply recommendations, so feel free to adjust them as necessary or in a way that is better suited for your goals or situation. If you are saving for a vacation or one-time purchase, put aside additional money every month to work towards that goal.
If you don’t feel like adding up every item by hand, use a tool like Ent’s Money Insight to automatically track your spending. Continue monitoring your habits over time to stay on track.
Save for Retirement
If you haven’t started saving for retirement, now is the time to get started. Many Americans don’t have enough money saved for retirement, which could lead to working later in life or reduced spending in retirement. Start coming up with a plan for your golden years, including how long you plan to keep working and how much you will need to maintain your current lifestyle. Use a Retirement Planner Calculator or contact a financial advisor that will help account for factors that you might otherwise miss, such as inflation, market volatility and medical expenses.
There are several ways to create a retirement plan. If you have access to an employer-sponsored 401(k) through your job, see how much you are stashing away for retirement every month. You may need to supplement your savings depending on how much you will need for retirement.
If you don’t have access to a 401(k) or would like to save additional money for retirement, consider opening a traditional individual retirement account (IRA) or Roth IRA. Both types of accounts come with certain tax advantages. Learn more about the benefits of putting your money in an IRA.
Prepare for the Unexpected
You never know when life might take an unexpected turn, so it’s important to create an emergency fund. Experts recommend having anywhere from three to six months’ worth of living expenses available in the instance that you are out of work or have a medical emergency.
Put some money aside every month for the unexpected. Consider how much money you will need to pay medical deductibles or other emergencies and take steps to limit your risk.
It may seem like a daunting task to build an emergency fund large enough to cover six months of expenses, but it’s important to remember to start small and set goals and milestones. Start saving a little each month, even if it’s only $10, and set smaller goals like saving enough to cover your monthly grocery bill. Once you hit that milestone you can work towards saving for your rent or mortgage, before saving for multiple months’ worth of expenses.
Work Towards Becoming Debt-Free
If you are still carrying around debt from a credit card or your student loans, paying off that debt is probably one of your top financial priorities. Carrying this debt may inhibit your ability to buy a home, car or save for retirement.
To manage your debt, start by taking stock of all your existing debts and how much you owe every month. Try to pay off any interest you accrue every month to avoid paying compound interest and having your debt grow. Paying more than the minimum can help pay the debt off faster by chipping away at the principal balance. Try the avalanche method, which involves paying off the debt that has the highest interest rate first, that way you’ll save money on interest payments in the long run.
Diversify Your Portfolio
It’s best to reevaluate your investment portfolio at least once a year to make sure your holdings match your needs, risk tolerance and long-term goals. Consider diversifying your portfolio by using investment products such as mutual funds and exchange-traded funds (EFTs) to reduce your risk. Use tax-advantaged accounts where appropriate for tax efficiency and to help save for retirement.
Meet with a financial advisor to help you learn about how different investment options can help you toward your financial goals.
Double Check Your Insurance
Start off the new year by making sure you have adequate health coverage with an affordable deductible to limit how much you will have to pay out-of-pocket.
Consider applying for life insurance sooner rather than later to lock in a low monthly rate if you have loved ones or dependents, or debt like student loans or a mortgage that you don’t want to leave behind. The older you become, the higher the monthly premium.
It may also be prudent to consider disability insurance to make sure you have income if you can no longer perform the essential duties of your job. Your employer may offer group disability coverage for a low monthly premium, or you can look at private disability insurance that remains in-force if you leave your employer.
Update your home and auto insurance to make sure you have enough coverage in an emergency. Consider using a broker to shop around for the best rate before your next renewal or consult with an insurance advisor that can help you find the right policies based on your needs.
As we celebrate the new year with optimism, take a few moments to think about your finances. What small changes can you implement now that will have tremendous and long-lasting impacts. Incorporate these New Year’s financial resolutions into your monthly routine to make the most of your hard-earned money.