A few worthy New Years Resolutions
By the time this blog posts, many of us will have already broken our resolutions for 2019. That doesn’t make us bad people… rather, we’re good people who make bad resolutions.
Bad resolutions are those that are over-ambitious, or that are too vague, or that really aren’t all that important to us. Here are some good examples of financial resolutions that often don’t survive to see the spring:
- I’m going to get a handle on my cash and budget
I’m going to finally get my insurance in line
I’m going to start planning for my retirement (or my kids tuition)
I’m going to get my estate planning done
I’m going to make sure my investments are lined up correctly
Fortunately, there are ways to give all of your resolutions, including this laundry list, a much better chance of surviving the year. People who study these things say that we can make progress on our resolutions if they’re “SMART” (Specific, Measurable, Achievable, Relevant, and Time-bound). All of these elements are important, but I’m going to focus on the one that I think is most important: Achievable. Or, better put, EASY.
Here are some ideas on ways to make our list achievable.
- I’m going to get a handle on my cash and budget: Dig out (or download) your bank statement from a year ago (and your credit card statements if you carry a balance on these). Do you have more money and less debt (or less money and more debt)? Sure, you could track your income and spending line-by-line, but this 5-minute step will get you to the bottom line a lot faster. Once you have the annual difference in savings balances and consumer debt, you have a number which, when divided by 12, is the monthly amount of spending you need to cut (if the number is negative) or your monthly savings capacity (if positive). Want to make easy changes? Apps such as “Chime” “Digit” and “Acorns” are among a growing number of ways to force yourself to save.
- I’m going to finally get my insurance in line: It’s easy to let complexity around insurance and risk management prevent us from taking steps to make sure we’re covered. Take 30 seconds to answer the following two questions:
- Do other people rely on my income? (If ‘yes’, you probably need life insurance.)
- Do I rely on my income? (If ‘yes’, you probably need disability insurance.)
Next step is figuring out how much of these you need. It’s not as hard as you think. Click here for some links to easy calculators, speak to your advisor, or just call an insurance agent (keeping in mind asking an insurance agent if you need insurance might be a bit like asking a barber if you need a haircut).
- I’m going to start planning for my retirement (or my kids tuition): How much do you spend monthly? (hint – it’s your take-home pay less any routine savings). Are any of those expenses (like a mortgage) going away in retirement? If so, subtract them out for a ‘Present Value’ retirement budget. Multiply that number by 25 and that’s what you need to have saved up in order to retire. This is a vast simplification of the process, but it’s a step that might carry you further down the path of more nitty-gritty planning.
- I’m going to get my estate planning done: Estate planning often gets an unnecessary rap of being a complex, expensive process for the wealthy. In fact, a lot of progress can be made without even using an attorney. Correct beneficiary designations on retirement plans and insurance policies can go a long way, as well as proper ownership structure on accounts and assets. Click here for a deeper dive into these issues. Of course, an advisor or attorney can and will make sure you have the rest of it handled, too.
- I’m going to make sure my investments are lined up correctly: I read an article that said 40% of investors don’t know how they are allocated. Speaking from experience, I think that may be on the low side. That’s not a huge problem (heck, I couldn’t rattle off how my 401(k) is allocated, off the top of my head) as long as SOMEONE is paying attention to it! Obviously, we think professional management of investments can be helpful here – but even for those who don’t engage with a professional, there are ways of keeping things in balance. One is by using ‘Target Date’ funds, available in most modern retirement plans. While these don’t take into account your own tolerance for risk, they are likely to be appropriate for many investors within the same demographic, and they will be reliably diversified. Bottom line: unless you have nerves of steel, don’t try to manage your own. Leave it to a pro, or to an appropriate automated diversification strategy. A 10-minute investment of time to reallocate assets to such an option can save a lot of heartache down the road.
With all of these tasks above, you could conceivably knock out a year’s worth of financial planning resolutions in the course of an afternoon! Sure, these items aren’t going to do the whole job – and either way, none of these are ‘one-and-done’ tasks… They should be reviewed at least annually. But what a start to a new year!!
I’ll leave you with a proper Irish blessing: “May your troubles last only as long as your resolutions!”