It’s that time of year and my unofficial study of everyone I’ve ever known shows that 99.9% of New Year’s resolutions include money. Saving more, spending less, increasing earnings – most of us include some form of financial health as one of our goals for the New Year. ‘Getting my finances together’ is on everyone’s list, but often pushed down with every new list addition. Getting started is a daunting task, and many are intimidated to do so – but you don’t have to be a sophisticated investor to manage your finances. And your financial health is just as important as your physical and emotional well being, and needs just as much attention. Managing your finances shouldn’t be considered optional. Just like diet and exercise, it’s an area of your life that has to be supported. Poor financial health not only creates the obviously money problems, but also causes stress, depressions, marriage problems and health issues. The below steps are simple to do and will make a significant improvement for the new year.
- Commit to Getting Your Finances On Track. After the year we’ve experienced, what better time to start your path to financial health than 2021? The first step is always the hardest, and if you’re still reading this article, you’ve already completed it.
- Organize Your Net Worth – First list out all of the places you have money. This will include retirement accounts (think old 401ks, IRAs, etc), brokerage accounts (any investment account that isn’t retirement), savings, checking, CDs and 529s. Find a recent statement online or in your files for each and list out the total dollar amount in each account. Then move on to other assets, like home, car, valuable jewelry, etc. List the approximately worth for each item. The total dollar amount of all of these items combined equals your total assets. Do the same thing with your debts – list each account and the value for your credit cards, student loans, mortgage, HELOC, etc. The total is your liabilities. Subtract your liabilities from your net worth, and you have a snapshot of your financial health.
- Set Your Goals – Many see this and their eyes start start to glaze over, because financial goals are obvious, right? Spend less. Save more. But a true financial plan includes your life goals. How do you know how much to save if you don’t know what you’re saving for? Money is just the tool that will help you reach them. Maybe you want to save as much as you can now to retire early – great, that’s a goal. Maybe you want to buy a home in 4 years – goal. Or, you could be looking for a simpler life of travel and don’t want to be burdened by a 9-5 office job. Your goal for earning money may be freelancing. Organize your goals in terms of timing: Start with 1 year, 3 years and 5 years. List them out, and how money can help you obtain them.
- Record Your Budget – Notice I don’t say ‘Make’ a budget. Budget may as well be a four-letter word, but it doesn’t need to be a form of torture. The idea is not to set a strict spending schedule and never spend an extra dollar over that amount. The purpose of a budget is to simply see what you earn each month, how much you spend and what’s left over. List fixed expenses that are set each month (rent/mortgage, bills), discretionary costs (travel, eating out) and how much you save each month. The goal is to have a positive balance after you subtract expenses and savings from income. Then just use this as a guide for your spending. You don’t need to monitor it constantly, but look at it once a month and see if you’re on track. Setting it up is the hardest part – once you have a budget, it will make you feel more in control and confident with your finances.
- Save. Save Somewhere, Anywhere – I often have clients ask me where is the best place / vehicle to put their money. Should they put it in retirement, keep in cash, pay off mortgage quicker or invest in the market? While there are multiple savings strategies depending on your age, goals and worth, for those just getting started the simple answer is – just start saving. Automate $100 every month to be transferred from your checking to savings. Set up your 401k at work and contribute 2% of your salary. There is no such thing as a wrong way to save. The goal is to create the habit of not spending everything you have, and creating a safety net. Just get started, then you can create a more detailed strategy down the road.
The start of the new year brings about a chance to start over, to do this year better than the last. By just taking a few hours to complete each step on this list, you’ve already become more financially healthy, which will lead to improved overall health, confidence, opportunities and a better life.