2021 is winding down, which means it’s time to think about resolutions for the coming year. With the rising taxes and out-of-control inflation, financial resolutions are foremost in the minds of many pre-retirees and retirees alike.
If you’re someone who likes to make New Year’s resolutions, you already know how hard it is to stick to them. One report puts the failure rate at 80%. Yet, more than 55% of U.S. adults think they’ll follow through on their resolutions this year, a recent survey by the Finder found.
This year however, why not embrace the fresh start the new year brings? 65% of Americans age 18 and older are considering a financial goal for the new year, according to this 2021 financial resolutions study. It's a great time to commit to your money goals, budget better, pay down debt, plan your taxes, ditch bad habits and improve your financial picture to reach your goals.
Here are a couple of resolutions that could help increase your financial planning strategy and hopefully inspire you to stay committed to them throughout the new year.
Create a Budget
Saving and investing during your working years should lead to a rising net worth over time, helping you to achieve many of life’s most important goals. Creating your own budget and net worth can help you build your road map and stay on track. Here are steps that can help:
- It's important to have a budget with these three things in mind: how much you’re taking in after taxes, how much you’re spending, and how much you’re saving. Try tracking your spending using a spreadsheet or an online budgeting app for 30 days. Determine how much money you need to cover your fixed expenses, such as your rent/mortgage and how much you’d like to put away for other goals. If you aren’t retired, create an emergency fund with three to six months’ worth of essential living expenses, set aside in a savings account. The emergency fund can help you cover unexpected and necessary expenses when you least expect it.
- Calculate your personal net worth annually. Make a list of your assets and subtract your liabilities. Subtract the liabilities from the assets to determine your net worth. Don’t panic if your net worth declines during tough market periods. What’s important is to see a general upward trend over your earning years. If you’re retired, you’ll want to plan an income and distribution strategy to help make your net worth last as long as necessary and to support other objectives.
- If you're retired, consider keeping 12 months of living expenses after accounting for Social Security or a pension in short-term CDs, an interest-bearing savings account. Consider keeping another two to four years’ worth of spending laddered in short-term bonds or invested in short-term bond funds as part of your portfolio’s fixed income allocation. This helps provide the money you need in the short-term. It also allows you to invest other money for a level of growth potential that makes sense for you, while reducing the chances you’ll be forced to sell more volatile investments (like stocks) in a down market.
Manage Your Debt
For most people, some level of debt is a practical necessity, especially to purchase an expensive long-term asset to pay back over time, for example the purchase of your first home. However, problems arise when debt becomes more of a burden than a tool. Here’s a couple tips on how to stay in control.
- Keep your total debt load manageable. Keep the monthly costs of owning a home (principal, interest, taxes, and insurance) below 28% of your pre-tax income, and your total monthly debt payments (including credit cards, auto loans, and mortgage payments) below 36% of your pre-tax income.
- Eliminate high-cost, non-deductible consumer debt. Try to pay off credit-card debt and avoid borrowing to buy depreciating assets, such as cars. The cost of consumer debt adds up quickly if you carry a balance. Consider consolidating your debt in a low-rate home equity loan or line of credit and implement a schedule to pay it back.
- Match repayment terms to your time horizons. Create a plan to pay off the mortgage on your primary home before you plan to retire. If you’re likely to move within five to seven years, you could consider a shorter-maturity loan or an adjustable-rate mortgage (ARM), depending on current mortgage rates and options.
Protect Your Estate
An estate plan may seem like something only for the wealthy. But there are simple steps everyone should take. Without proper beneficiary designations, and a will, the fate of your assets or minor children may be decided by attorneys and tax agencies. These fees can eat away at these assets, and delay the distribution of assets just when your heirs need them most. Here’s how to protect your estate—and your loved ones.
- Review your beneficiaries, especially for retirement accounts, annuities, and life insurance. A beneficiary is designed to be your first line of defense, to make your wishes for assets known, and ensure that they transfer to who you want quickly.
- Update or prepare your will. A will isn’t just about transferring assets. It can provide for your dependents’ support and care, and help you avoid the costs and delays associated with dying without one. It can also spell out plans to repay debts, such as a credit card or mortgage. Keep in mind that a beneficiary designation or asset titling trumps what’s written in a will, so make sure all documents are consistent and reflect your desires.
- Coordinate asset titling with the rest of your estate plan. The titling of your property and non-retirement accounts can affect the ultimate disposition and taxation of your assets. Talk with an estate planning professional about debts and the titling of assets, such as a home, that don’t have a beneficiary designation, to make sure they reflect your wishes and are consistent with titling laws that can vary by state.
Put Yourself First
It's all too easy for you to become engrossed in the day-to-day demands of life, work and family. Paying yourself first generally means "paying" your future self money. It's important to do it first because if you pay yourself last, chances are you won't pay yourself at all. An easy way to pay yourself first is by contributing to a 401(k), especially if your employer offers matching contributions.
Set a goal of setting aside 10% of your income each month for a future need such as retirement. If your employer matches up to 4% of your annual income, then you would only need to contribute 6% of your income to pay yourself 10% of your income for retirement.
Finally, invest in your financial future by making an appointment with your wealth management advisor. Financial advisors can be a great help in getting a handle on debt. They're experts at helping their clients get their finances in shape for today and the future. They may provide several services, such as investment management, income tax preparation, and estate planning. When you meet with your advisor, ask them (and yourself):
- Is my investment strategy on track?
- Am I saving in the most tax-efficient way?
- Do I have adequate life insurance for my situation?
Hiring a reputable financial advisor to help draft a debt reduction strategy and a financial plan going forward is an extremely beneficial way to get your debt under control.
Lastly, remember you don’t have to do everything at once. There’s a lot you can do to improve your financial health by taking one step at a time and think of these resolutions as a checklist. It’s all about taking the time (no matter how hard it may be to squeeze it in), doing some planning and keeping your eye on the prize.
There’s no one-size-fits-all financial plan. Your situation is unique, and your goals are your own. Our financial advisors can help you create a personalized plan that fits your life. Want to gain better control of your finances? The trusted team Agemy Financial Strategies is here for your every step of the way to make some real progress on your journey to financial freedom this coming year.
When the hustle and bustle has passed and the holiday dust has settled, talk to one of our wealth management professionals so we can make sure you’re starting 2022 off on the right foot.