Another year has passed and as usual, it is a time to reflect on the past year and establish strategies for greater achievement in the coming year. While time marches on, it seems to go by faster as you get older. You are one year closer to retirement, and hopefully in a better financial position today than this time last year. Reflection should not be all about short falls. This is an opportunity to evaluate what worked and celebrate those victories and a time to consider what did not work and create a strategy to change that.
If nothing is done differently, you will have the same results from the past. Tomorrow always arrives whether you are ready or not. Establishing a long term plan and tweaking what you are doing today will increase your successes and allow you to reach the long term objectives that matter the most. Setting financial goals may not be fun or sexy. But, it is critical to finding financial success and having more control over the income you make.
What To Do Right Now: Create a Debt Management Plan which should include long and short-term strategies. To increase the odds of success, goals need to be realistic, measurable, and broken down into bite-size pieces. When implementing, find a way to work it into your routine. Put a line item in the budget, automate the process, and put reviews on your calendar to measure progress. A debt management plan should include ways to eliminate high interest debt and a strategy to live within your means so new debt is not acquired subconsciously.
Find a way to track spending that you can live with. Most of us underestimate the amount we spend by 20% to 30%. Tracking spending can be done with spreadsheets, by hand, or with online apps like mint.com. The rebellious side of us may resist the practice, however, doing so gives you more control of your money and ensures spending is based on actual priorities rather than impulse purchases.
Create a budget you can really keep. Everyone knows you should keep a budget, yet only a small percentage successfully maintain one. Instead of making the budget restrictive and hard to follow, match the budget to your current spending habits and then tweak it in ways that don’t feel like major sacrifices. As spending patterns change, adjust the budget accordingly. With a budget small, steady changes win the race because it prompts behavior changes you can actually achieve. Even if things are tight, including small splurges will help prevent big splurges that blow your budget.
Review insurance needs for all insurance products you own. This might include policies such as life, disability, long term care and health insurance. Evaluate needs compared to the policies you own and make changes when necessary. Compare costs across providers as well as coverage. When you skimp on insurance coverage, you could find yourself with large financial outlays that can ruin the most well thought-out budget plan.
Make progress on long-term financial goals. Have you maxed out your 401(k) contributions or contributed to an IRA? 401K contributions for the year reduce take home pay with pre-tax dollars. IRA contributions can be made until April 15th the following year. If you are unable to max out these plans, at least increase 401K contributions by 1%. This strategy results in minimal impact on take-home pay and yet can increase retirement balances significantly over time. Other financial goals might include children’s college funds, traveling, debt reduction, and long-term health care needs. Successful reviews are not focused on finding problems but include celebrating successes and tweaking goals to meet your needs.
De-clutter and eliminate stuff. Americans have way too much stuff and Christmas tends to be a time of additional accumulation. Decluttering frees you from items no longer used, have outgrown, or is otherwise taking up space without adding value. Selling these items creates found money that can help pay for holiday expenses, enable you to increase contributions to long term goals, or pay down debt.
Income “Happiness” Review. Most feel if you had more money you would be happier. The truth is, the more you make, the more you spend. Higher income, without controlling spending, results in higher living. You now “need” or “can afford” a bigger home, more expensive cars, and overall higher levels of spending that meet the increases income. This pattern is repeated at all income levels. If you make $100,000 you think all your financial woes will be solved if you made $150,000. If you make $50,000 you want $75,000. That being said, if you are having trouble paying your current bills, an increase in income can provide needed relief, as long as higher spending doesn’t follow.
When reviewing income start with payroll deductions. There may be ways to reduce these by reducing benefits or increasing your withholdings to increase take home pay. Those who receive an annual tax refund can raise your withholdings. This will result in a larger paycheck but a smaller refund. Other income strategies can include a second job or an additional income stream. Raises and promotions may also be part of your strategy to increase income in the new year.
Plan for taxes early. The best time to establish a tax strategy is at the beginning of the year. Deductions generally must be paid by December 31st to qualify for the upcoming tax year. Meeting with a tax adviser might uncover purchases you can make now that can reduce this year’s tax liability. You will also be able to set a plan in place to minimize taxes for the following year. Home improvements, energy efficiency, business expenses, and charitable donations can reduce taxable income. Establish a process for maintaining information and receipts because deductions are limited to what you can prove. Understanding what deductions are available and maintaining records will help you save money and minimize what you owe the IRS.
Commit to one big thing you want to change. One of the challenges with New Year’s resolutions is that you make a long list of things you want to change and by February 1 you have given up. If you limit resolutions to one area of your life, then you will be more focused on that one goal. Then, break down the goal into bite-size pieces giving you a much higher rate of success. For financial goals, reducing debt can be just as profitable, or more profitable than increasing retirement funds, because when you reduce debt payments you free up money that can be contributed to long-term goals.
The end of the year offers a Do-Over. Take a little time to assess where you are compared to where you want to be. Happiness comes from living the life you want, not just having more money to spend.