Making a Change

Six Financial Planning Steps for the New Year

To many cultures, the beginning of a new year is a time for new beginnings and self-improvement. Along with the old standard of promising to exercise more and eat less, many Americans use the change in calendar as a reason to address their bad financial habits. For instance, at the end of last year, 36% of Americans considered making financial resolutions, according to the 2017 New Year Financial Resolutions Study by Fidelity Investments. At the top of these lists: saving more, paying down debt and spending less. Sounds like a plan!  But how do you get there?

Make a Plan                                                                                                               

Here are six steps that will help ensure that your resolutions are followed with positive action.

(1.)  Determine your current status. To assess where you want to go, you first need to know where you are. How much do you have in savings and other assets? How much are you earning and spending? Gather all of your W-2 and 1099 forms, as well as any documents that provide information on your spending, such as mortgage and credit card bills. Create a cash flow statement that shows how much you took in and spent over the past year.

For greater clarity, monitor all of your spending for a given week or a month. Include even small, discretionary purchases, such as coffee. Once you have assembled this information, your records may show you’re spending more in certain areas than you may have thought. Similarly, total all of your financial assets, including bank and investment accounts. These will help show how well you’re protected against the uncertainties of life, be it the loss of a job, a major home or car repair, or an unexpected medical expense.

(2.)  Establish a budget. Many financial experts advise segregating expenses into several categories: needs, wants and savings, and for some, a category for charitable giving. You’ll need to identify the breakdown that best suits your income and expenses, but here’s a starting point: 50% to 60% of expenses should be allocated to necessities, 20% to 30% to wants, and 20% to 30% to savings and charities. While every budget is different, if “wants” are consuming much more than 30% of your budget, it may make sense to see where you can reduce spending.

(3.)  Cut debt. If possible, try to pay off outstanding balances to cut interest expense and free up money to put toward saving. A common approach is to maximize payments toward the debt with the highest interest rate first, since this is your greatest expense. Meanwhile, continue making minimum payments on the other loans. Once the highest interest rate debt is paid off, move to the debt with the next highest rate.

(4.)  Boost your emergency fund. Most financial experts recommend having six months of cash or other liquid assets you can access in an emergency, so you’re less likely to go into debt. Clearly, building an emergency stash often requires taking a hard look at expenses. Can you cut cable or internet expenses? Eat out less frequently?

Another option, where possible, is to take on a part-time job and allocate the extra income to your emergency fund. You can also inventory your home for any items which you no longer use that can be sold. Also, you can let other family members know why you’re cutting back and how they can help. When everyone understands the goals, they may find the sacrifices easier to process and accept.

(5.)  Review your insurance coverage, estate planning and retirement savings. Look into both your insurance coverage and your beneficiaries. If you had a child during the year, you may want to increase your life insurance coverage. If you married or divorced, you’ll probably want to change the beneficiaries.

In addition, check to make sure that your estate planning documents are up to date and reflect your current game plan and life situation. Is the executor named in your will still able to carry out these responsibilities? Does your medical directive reflect your current thoughts about the steps you’d like taken in an emergency?

Finally, look at your retirement savings. Many online calculators can help you determine if your savings plan is likely to cover you after you retire.

(6.)  Track progress toward your goals. Whether you use pen and paper or an app on your smartphone, tracking progress is key to understanding how well you’re moving toward your goals. What’s more, seeing your progress in black and white can help you stay on track, even when you’re tempted to stray.

Make Positive Changes

Making financial resolutions and then holding on to them can have a noticeable positive impact. The Fidelity survey found that 49% of respondents achieved 80% or more of their goals. And this is key: nearly two-thirds of those who achieved their goals had improved their financial situation. Your financial advisor can help you create a feasible financial plan for the new year.


Sidebar: Should You Save — or Pay Down Debt?

Should you put money toward savings before you’ve paid off your debt? Everyone’s overall situation is different and there is no single answer which is right for everyone. But it typically makes sense to pay off debts, like most credit cards, that carry a significantly higher interest rate than you can earn on saving or investment accounts.

On the other hand, making extra payments against debts that carry low interest rates, such as mortgages in many cases, can be less helpful if you have nothing in savings. Should an emergency arise, you may end up taking on debt with an interest rate that’s far higher than the rate on the debt you paid off.

© 2017

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