The New Year brings with it new resolutions for self-improvement. Many people want to improve their personal finances, but don’t know how to achieve their goals. The key to making a meaningful financial improvement is to focus on the process and the things that you can control. Below are some suggestions that anyone can easily implement to improve their financial well being in 2018.
1. Increase Your Savings Rate
There are several ways to accomplish this goal. If you aren’t contributing the maximum amount to your company-sponsored retirement plan, such as a 401(k), then simply increase your percentage contribution to the plan. For those that are already maxing out their company-sponsored retirement plan, perhaps you could contribute to an IRA or Roth IRA.
If you are already filling your retirement buckets to the max, then start making regular contributions to a taxable savings account. Maybe it is an investment account or maybe you could pad your cash in your emergency fund. However you accomplish it, increasing your savings will boost your net worth and improve your overall financial health.
Because many people don’t know how much they save on an annual basis, a related goal may be to determine the actual dollar amount you are saving and determine if that number could be higher next year. This is useful step when it comes to reverse budgeting.
2. Track Your Spending
Let me lay out how this can be done easily:
- Step One: Sign up for Mint.com.
- Step Two: Enter your checking, credit card, and investment accounts.
- Step Three: Be amazed at how easy it is to track your expenses!
Mint will allow you to categorize every single purchase and transaction if that interests you, but most people won’t want to take the time to do this. No problem! Even without categorizing every single purchase, using Mint.com for a year or so should give you and/or your advisor enough data to determine your typical monthly spending rate.
Understanding your average monthly or annual spending makes it easier to successfully plan for your financial goals. For example, planning for the retirement goal of “maintaining your current lifestyle without running out of money” can’t accurately be done unless you have a handle on what your current lifestyle costs on a monthly or annual basis.
There are many free or low-cost options for tracking expenses, so try a few out to see which works best for you.
The greatest financial decision I’ve ever made was to put my finances on autopilot. Finances have a way of getting increasingly complicated in all stages of life. Putting your savings, bills, and investments on autopilot can greatly simplify things.
It starts with your checking and savings accounts. Direct a portion of each paycheck out of your checking account and (depending on your goals) into a savings account, towards an extra payment on high-interest consumer debt or into an investment account.
Next, focus on your bills. I challenge you to find a bill that can’t be set to be paid automatically – credit cards, mortgage, utilities, memberships, tuition, etc – there is no reason to worry if you have paid a bill or not.
Once you have your savings and bills on autopilot, the last (and arguably most important) step is to set up automatic investing. This means different things for different people because of varying risk tolerance, portfolio size, liquidity needs and time horizon. The one thing that holds true for everyone seeking to automate investing is that you make automatic deposits into your investment accounts to be invested at predetermined times to prevent market timing.
4. Set Clear Financial Goals And Take Steps To Achieve Them
Writing down a goal with an estimated date and expected cost dramatically increases your likelihood for success. It also allows for you to understand the things that are most important to you.
Some financial goals, such as retirement, require extensive modeling due to the many variables in play and is best done with the assistance of someone experienced in retirement planning. Others require less computing power such as setting up an emergency fund with 6-12 months living expenses, buying a car, or making a down payment on a home.
Start by writing short-term goals (5 years or fewer), the date of desired completion and the expected cost. If you add up the expected cost of all your goals, then you can determine how much you need to save every month to make this happen. Once this is completed, then number the goals according to your priorities – now you know where to begin directing your monthly savings. This is a process that I refer to as reverse budgeting.
Do the same exercise for intermediate-term goals (5-15 years). Finally, be bold and come up with some long-term goals (15 years or more). It may be difficult to assign an expected cost to your long-term goals, but that’s ok, at least you are thinking about it.
Peter Lazaroff is the Director of Investment Research at Plancorp. With $3.03 billion in AUM (12/31/15), Plancorp gets your entire financial house in order by engaging in comprehensive financial planning.
[Source : https://www.forbes.com, 15/Feb/2018]