Editor’s Note: This is the first of a two-part series. Part 2 will appear next Monday.
The start of the New Year means more to me than just hitting the reset button on things I like to measure. The turning of the calendar demarks another year of age, a new diet and workout plan, a new measurement period for stock market returns, the reset of our medical insurance deductibles, and for some, an opportunity to reflect on the past year as we consider behavioral changes for the upcoming one. The start of the New Year is when we convert these potential changes into promises to ourselves, collectively known as “resolutions” — a term rarely used outside the context of a new year.
New Year’s resolutions are both uniquely individual and broadly common, and generally built on one’s perceived past shortcomings. One person hits the gym in order to sculpt the perfect six-pack, while the person using the next locker is struggling with obesity. What we all share is hope that our aspirations will triumph over our past experiences. The same is true with financial resolutions. We each approach the New Year from our own unique circumstances, but we share the common goal of becoming more responsible with money.
We all know that most resolutions fail to be kept … often by February. Here are some financial resolutions that are relatively short term — hopefully can be achieved in January — thereby increasing the likelihood that within the next few weeks you may achieve progress towards fulfilling at least some of your financial resolutions.
Create a Set of Financial Goals
What do you want to accomplish financially? Is your focus on getting out of debt? Starting a systematic savings and investment plan? Funding your children’s education or your retirement? A great starting point to achieving financial success is to state your objectives as specifically and actionably as possible. There is little power setting a broad goal such as “pay off debt” or “retire comfortably.” Rather, I like to see “refinance high interest debt,” “build an emergency fund of three months of expenses,” “start a savings plan of 10% of net salary from each check,” or perhaps “schedule an appointment with an estate attorney.” There is great power in specificity. Also, there is power in writing out your financial goals, and where appropriate, marking appropriate dates in your calendar (e.g., mark the 15th of the month following each calendar quarter to review your asset allocation.)
For financial goals to be meaningful, you need a starting point. That is, know where you are financially right now. Getting organized can provide you with the base upon which you can build a plan for financial security. Gather all your financial documents, including investment and loan statements, checkbook stubs (or an electronic printout), last year’s tax returns, year-end credit card summaries and paystubs. (This is also a good time to set up a folder to gather your 2021 tax information.) You want to create a current balance sheet, which can be updated as yearend statements arrive. You also want to gather the expense data needed to develop a budget. While this can be a daunting task for many people, it is important to remember that the hardest part of this exercise is getting started. After all, how can you modify your financial behavior without knowing how much you are currently saving and spending? If you are reasonably computer literate, there are many budgeting programs on the market. I’ve been using Quicken for years and find it very helpful.
Prepare a Budget
Preparing and working off a budget doesn’t guarantee that you’ll achieve your financial goals, but not having one almost certainly assures failure. The approach I recommend is to create an analysis of last year’s income and expenses as a starting point. The income side is fairly straightforward; expenses can be categorized by reviewing check stubs and credit card summaries. Then evaluate which of the expenses will be materially different during the coming year by taking a look at past nonrecurring expenses and anticipating future one-off expenditures. A word of caution: as with any discipline, going to extremes is rarely an effective strategy (losing weight by practically starving yourself is a great example). Make sure that your budget allows for the flexibility of a fair amount of discretionary spending — not doing so is akin to a diet that never allows for a drink or dessert. Again, I’m also a believer that software programs can greatly assist with the budgeting process.
Reinforcing the point just made, attitude is a major factor when it comes to controlling spending. If your approach is that of deprivation, that is, forcing yourself to give up all purchases that enhance your life, then failure is inevitable. Alternatively, an attitude that reduces spending while prioritizing things that are important to you, such as occasional vacations, sports and cultural events, increases the likelihood that the budgeting process will be an uplifting experience that will lead to a successful financial outcome.
The process of setting goals, getting organized, and preparing a budget will give you a sense of control over your financial life, and is a great way to start taking actionable steps to secure your financial future.
In next week’s column, I’ll discuss some additional specific actions that can assist you towards your goal of financial independence. Have a happy, healthy and prosperous New Year!
The author does not provide tax, legal, financial or investment advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, financial and investment advisors before engaging in any transaction.