It’s a New Year and a new you, and nothing would be better than to have health and wealth for many years to come. With that in mind, here are the top three personal finance goals I recommend adding to your New Year's resolutions.
- Increase your financial IQ.
Your top personal finance goal should be to build wealth, and the number one step is to change your mindset. It is essential to focus on learning more about money to make the important behavioral and financial changes necessary to achieve your goals.
There are many resources available to educate yourself about personal finance. A great place to start is Policy Genius’ "7 habits to boost your financial IQ.” Their approach suggests you begin by learning about personal finance and start tracking your net worth and spending. A best practice they embrace is to consult with experts, such as a tax advisor and financial advisor, to help you get on and stay on the right track.
- Build your nest egg.
Make 2021 all about you. Be selfish and laser-focused on building the nest egg you’ll need for your future self. Tax-deferred growth of your dollars is a powerful strategy available to almost all of us.
Start by taking small steps, such as increasing your 401(k) contribution by as little as 1% year-over-year until you reach your maximum allowable contribution. Chances are you won’t even miss it.
There are other strategies for those who have already maxed out their 401(k) contribution. You can also contribute to an IRA. You may be able to fund a tax-free Roth IRA, depending on your income. And you can still contribute to your 2020 IRA until April 15, 2021.
While a Roth IRA may seem like a good deal, it’s limited in how much you can contribute each year; be smart in funding this over time, as that’s the best way to build for your future. The Motley Fool has a helpful article detailing “How to build your nest egg in 5 easy steps.”
- Know your number.
Your number is the amount needed to fund your nest egg to support your lifestyle in retirement. A quick way to determine your number is to calculate how much you will spend in retirement. For example, let’s say your current spending is $100,000 a year. Once you retire, you believe you can get by on 80% of that, or $80,000, as you no longer have to pay employment income taxes, the cost of commuting, work clothes, etc. Then, let’s assume your social security benefits will cover $30,000 a year, leaving $50,000 to come from your investment portfolio.
One could say that conventional planning wisdom is like using home remedies to maintain your health: it can work, but it’s always better to seek professional guidance for something that’s so important. For many of us, our portfolio will need to support us for decades into the future. If you think that having a professional advisor is too costly, check out Vanguard’s Advisor Alpha study, which shows how investors benefit up to an additional 3% on their returns each year after hiring a financial advisor. To create a financial plan with confidence, look to partner with a CFP® professional who is obligated to act as a fiduciary. This means that a CFP® professional must put your best interest first when providing financial advice. Use the “Find a CFP® professional” search tool today to find a CFP® professional near you.
Start 2021 the right way and get moving with these three personal finance goals. Make this a priority now, so you have the financial resources you’ll need for the best future you.