Counting Down: Easy Financial Resolutions for the New Year
Every January 1st, around 40 percent of Americans pledge to make a life change. Not surprisingly, health and money goals top the list of the most popular New Year’s resolutions. Some focus on tangible items such as taking a much-needed summer vacation or saving $1,000. For others, more general resolutions suffice — for example, eating healthier or exercising more.
Unfortunately, only eight percent of those who make New Year’s resolutions actually keep them. The key, according to Forbes magazine, is choosing simple goals with quantifiable results. Strive to lose 10 pounds by August, not just “lose weight.” Pledge to put $50 extra into your savings account each week, not “save more money.”
While any small step you take towards improving your financial situation is a good one, you can boost your likelihood of landing in that eight percent by setting tangible, attainable goals for the New Year. Here are just a few of the concrete first steps you can take on the road to better financial health.
- Do a financial check-up: Once a year, most people turn to their doctor for a routine physical. Is everything working properly? Am I in good health? Do I need to change anything next year? These are the same questions you should be asking about your finances. A 2015 American Psychological Association survey found that 64 percent of Americans are stressed about financial issues, with 31 percent reporting money as a major source of conflict within their relationships. Conducting a yearly financial check-up may help alleviate money worries — or at least illuminate problem areas so that they can be addressed.
This is the time to take an honest look at your financial situation. Not just your bank accounts and monthly earnings, but the entire picture including investments, savings, debt, insurance and credit situation. Financial education site NerdWallet provides a helpful checklist of items you may want to consider during your annual financial review.
- Set a budget: Senator Elizabeth Warren popularized the 50/30/20 budget, where half of your income goes towards monthly bills, 30 percent to discretionary items and 20 percent into savings. But this rule of savings doesn’t apply to everyone. To make a successful budget for the New Year, start by listing each of your monthly bills and required payment amounts. Add budget items for necessary expenditures such as food, insurance and gas based on current spending, then incorporate discretionary items including clothing and entertainment. Make line items for savings and investments, if applicable. Once you have your desired budget in hand, calculate the total expenditure and determine if there is a negative gap between your income and your budget.
Take a look at your net monthly income and where your money is really going each month. See if there are any budget items that can be cut or trimmed. Eliminate luxury items. Consider refinancing loans to get a lower rate. If there is still a gap between your earnings and your desired budget, you may want to look at ways to increase your earnings such as asking for a pay raise, seeking overtime or getting a second job. Personal finance apps such as Mint and Wally can keep you on track during the budgeting process.
- Boost your emergency fund: Economists generally recommend having between two and ten months’ salary set aside in the event of a job loss or unexpected expense. Unfortunately, many Americans still live paycheck to paycheck. According to a Bankrate.com survey, 29 percent have no emergency fund at all, while more than one-fifth of respondents with emergency funds said they had saved less than three months’ worth of expenses. Having a monetary cushion to fall back on can be key to reducing financial worry.
Use a separate savings account for your emergency fund, and decide what dollar amount you’ll need to feel comfortable should you become unemployed or face unexpected medical bills. Put some (or all) of your budget for savings towards your emergency fund at the beginning of the year. Once you’ve reached your goal of having 3-6 months’ worth of living expenses set aside, you can then resume saving for purchases and larger items.
Now that your budget is in order and your emergency fund replenished, what next? Once you’ve tackled these three resolutions, it will be easier to move on to more specific, individualized goals such as improving your credit score or paying down existing debt. Remember not to be too hard on yourself if you wander off-budget or your emergency fund gets low. While it’s desirable to set a deadline for achieving your financial goals, it’s also important to be flexible as situations change.