The beginning of a new year is a great time to review your finances and make some positive changes. While financial resolutions are often specific to each individual’s situation (e.g. age, income, etc.), there are some that are considered universally beneficial.
Avoiding debt is crucial to financial success. In addition to a home mortgage, you should seek to pay off any debts and try to avoid taking on new debt. The closer you are to retirement, the more important this suggestion is. Even automobile loans are something to avoid — better to drive a car you can afford or keep your current car if you don’t have cash readily available for a new one. For existing debt outside of your mortgage, establish a schedule of accelerated payments to settle the amounts. It is advisable to pay off the highest interest loans first (after tax considerations).
Starting early on in your working life, saving for emergencies and retirement is crucial. We find that individuals and families who save 15 to 20 percent of their gross income starting in their thirties are highly likely to have a comfortable retirement. If you have started saving later than your thirties, your savings rate should be proportionally higher. Building savings not only creates financial security but also encourages smart spending habits and a less expensive lifestyle. Even better, consider spending only a small portion of raises, bonuses and other income increases during your working years. It is more important to ensure that you are saving enough money than it is to establish and follow a detailed budget. Individuals have different priorities on how they wish to spend their money: some prioritize travel, some prioritize clothes and some prioritize fine dining. What matters is that you build savings first, and then you can prioritize spending your remaining funds on what means the most to you.
Create a Financial Plan
It is crucial to follow a financial plan that includes insurance. You need to have a plan for the right amount and type of life insurance, disability insurance, health insurance and more. Insurance allows you to protect against large lifetime losses due to early death or disability at a relatively low cost. As you acquire savings, you can consider reducing or dropping insurance coverage.
You should consider asset protection issues that could result in a loss of savings. Have you established estate planning documents that will protect your family and assets in the way that you wish? Are you investing in a prudent and low-cost diversified manner? You can accomplish all this and more with self-study and time, or you can choose to work with an advisor. Such an advisor should be a fiduciary and CFP® certified to ensure you receive independent, aligned advice. Once you make a plan, stick with it, but also review where you are with your advisor on a regular basis.
Use the start of a new year as motivation to begin or continue the financial planning process. Use this time in your favor to build savings and create a financial plan!