New Year’s Financial Resolutions
We all know about, and many of us like to make, New Year's resolutions. But if we're honest with ourselves, for most, they end up being just good intentions and that's just about it. Many owners of fitness centers, for instance, will tell you that they need to bring in extra equipment for about the first ten days to two weeks to handle the extra crowd, after which things go back to normal and they need to move said equipment back out again.
When it comes to your finances, however, the start of the new year is a great time to take a few smart actions that are simple to accomplish and once done might not need to be tinkered with again until this time next year. If only achieving our fitness goals was that simple!
So, with that in mind, here are some suggested financial actions you should jump on right now!
1. Retool the Budget
Most businesses review and revise their business budgets with the start of a new year, and that's great advice for individuals as well.
Of course, this presupposes you have a budget in the first place. If you don't, start there. Take a look at past years' spending and based on that, budget your anticipated expenses by category (preferably by month). Then analyze expected income to make sure your expenses are covered, with an eye toward having some buffer left for unexpected surprises.
If it appears your income may not cover it all, go back through and look for ways and areas of spending you can "cut" your budget to eliminate the shortfall.
After doing this, take some time to also consider anticipated major one-off expenses you see looming in the coming year (think a vacation, remodeling project, that kind of thing). Be sure to build these into your budget as well.
And don't forget major life events and changes that may be coming your way. Events like getting married, having a baby, or changing jobs. These are vitally important to build into a successful and useful budget.
New to budgeting? There are a number of online budget tools that are available (just search "budget tools") or even software containing budgeting modules, such as Quicken.
You also may find a couple of rules of thumb to be helpful. One is known as the 80/20 rule, which says save 20% first and the other 80% is available to spend. Some people call this the "pay yourself first" rule.
The 80/20 rule is aa simplified version of the 50/30/20 rule of thumb, which allocates 50% of your take-home pay to needs, 30% to wants, and 20% to savings and/or paying off debt. This rule provides a bit more structure for those that need it.
2. Consider Emergency Savings and Build as Needed
Earlier I mentioned the wisdom of having a buffer in your budget for unexpected expenses. This is where a strong emergency fund can help reduce financial stress.
Many experts recommend an emergency fund equaling at least six months of normal living expenses. Some go as far as one year. If you have no fund at all, however, taking steps through your budget to at least have one to three months' worth of expenses on hand is a great goal to start with. Ultimately how much you end up with depends largely on your spending habits and what it takes to give you some financial peace.
To get started, calculate your important monthly expenses, including rent or mortgage payments, food, utilities, insurance, etc., and then decide on the number of months you want the account to be able to cover should you suddenly lose your source of income. Then, using your budget, begin the process of saving to build that fund.
And don't neglect to put that money to work for you, but in a way that still allows you quick access to the funds when needed. Readily available high-yield savings accounts are an excellent choice for this.
Not only does this fund give you a cushion should something like a job loss occur, but it can also provide relief for the inevitable one-time emergencies that come everyone's way.
3. Review Insurance Coverages
This is a perfect time to review life insurance, homeowners, vehicle, and liability insurance coverage. Make sure your policies cover the risks you need them to and do so with adequate monetary coverage. Increase coverage where needed, but also consider where cuts can be made without endangering you financially, to save on premiums.
Many insurance agents offer complimentary coverage review, but of course, their job is to sell you policies, so take that into consideration. It's also sometimes valuable to comparison shop between companies, and to remember that most offer bundling discounts.
4. Is Your Retirement on Track?
The new year is a perfect time to assess retirement savings and goals and to adjust as needed.
Do you need to contribute more by taking advantage of the larger annual contribution limits available in 2023 to IRAs and 401(k) plans? If you are age 50 or over, what about utilizing the additional so-called "catch-up" contribution that is available?
And if you are fortunate enough to work for an employer with a matching feature to their 401(k) plan, do everything you can to maximize the employer matching feature and not leave money on the table. Remember, because of interest compounding, even small changes can make big differences in what you have available later for retirement.
So that's it! Four relatively small, but hugely important beginning of the year financial tasks to keep you moving in the right direction.