New Year’s resolutions are bogus. Let’s be honest, if you were serious about changing a habit, you would have done so a long time ago. New Year’s Day is just a convenient way of putting off what you did not want to do in the first place.
Come on, between you, me, and everyone else reading this, how many of your resolutions have you already broken?
What you do with your health, career, and personal relationships is up to you. In the coming months you’ll get a few blog posts to help you in some of these areas. If you want to adopt some good financial habits in the new year though, here are a few ideas to set you up for success.
1. Live According to Last Year’s Standard
If you get a pay bump this year, whether it’s a raise or cost of living adjustment, put it into savings. You’ve already grown accustomed to living according to a certain amount, so make that mentality work in your favor. In fact, set up your direct deposit so that the extra amount goes straight into your savings account. You can’t miss what you don’t see.
Of course, if 2020 was exceptionally rough, make the proper adjustments. I’m talking extremely rough as in you lost your job, experienced medical hardship, and now live under a bridge kind of exceptionally rough. I’m going to assume you don’t fall under this category though, because flattering though it would be, I don’t think you would be reading this blog if you were in that position.
2. Put Your Savings on Autopilot
I am generally against automatic payments. I am a control freak and like to know where my money is headed before it leaves my bank account. It’s a good way of picking up on suspicious transactions.
If there is one exception to this rule, it would be savings. If you are not going to pay yourself the way I recommended you do in my budget strategy, you might consider letting the bank do the saving for you. Set up an automatic transfer from your checking account to your savings account a day after your regular paycheck typically hits your bank. I tell you to create a buffer in case payroll runs behind for any reason.
No, this is not the same as the suggestion above. In the suggestion above, you’re splitting the income stream before it ever comes into your bank. In this step, you’re taking money from last year’s living standard and putting it into savings, because I assume you were already saving long before you rang in the new year.
I’ve pounded this point before. I’ll repeat it here for my new subscribers. You do not save to deprive yourself. You save so you can spoil yourself on your own terms.
3. Adjust Your Tax Withholdings
If you count on a tax refund as part of your financial plan, you are doing it all wrong. When you file your taxes, you should count on little to no return. The bigger your return, the bigger the interest free loan you made to the government. Trust me, the government does not need your help in staying afloat.
Use this IRS tax withholding estimator to determine how much you should have withheld from your paycheck. The information you need to fill out the estimator is easy to obtain, and blind users will find the tool fully accessible.
You might discover the amount withheld is too much. This will immediately result in another bump to your paycheck. You’re probably going to assume I recommend you stick this in savings as well. If you do not have a retirement plan well underway, you would be right, but if your retirement looks good and your savings feel healthy, then use the money for something more gratifying than giving it to the government.
If you run the estimator and discover you are not having enough withheld, your paycheck will experience a drop. In the short-term, this is going to bite you, but better a small bite now than a financial feast later. Get that tax bill as close to zero as possible.
4. Make Retirement a Priority
It’s hard to think of retirement when we just climbed out of the craziness that was 2020. The world keeps turning though. One day you too will get off the carousel, and when you do, you will want to jump off with a secure stash of cash to see you through your golden years. I don’t want to see you depending on someone else’s financial benevolence for your well-being in your later years.
If your employer matches your retirement fund up to a certain percentage, make sure you contribute up to at least that percentage. If, for example, they match you up to 5 percent, put in the full 5 percent. That’s already 10 percent of your primary income that’s going into retirement. If you can swing it, put in more than the matching rate to maximize the power of compound interest.
If you do not get a retirement match at work, or if your employer does not even offer a retirement account, consider opening an individual retirement account at Vanguard, and no, Vanguard does not pay me to recommend them.
If you’re still in school, remember it is never too early to start thinking of retirement. You do not have to wait until you are in your 60s to retire. That is about the age you can start drawing Social Security, but don’t ever bank on Social Security to carry you through retirement. You might decide you want to retire early. Regardless, the magical power of compound interest works best the sooner you begin.
Making retirement a priority is the single best thing you can do for your financial longevity.
5. Put Money in Its Proper Context
Money alone will not make you wealthy. It will certainly not make you happy. I get this is more of a mental exercise than a tangible step in the new year, but it is likely the most important item on this list.
From time to time you will read advice from me that falls along the lines of a cynical mind frame: If it don’t make dollars, it don’t make sense.
Your humble correspondent is not perfect. When I start to sound as though everything in life needs a dollar value, it probably just means I have not been good at saying no to people lately. I realize I have not made enough time to pursue my own interests and get upset that my best efforts are being used on driving someone else’s ambitions. There’s nothing wrong with putting your interests first for a change.
But money in of itself is not the secret to personal fulfillment. If I strive to accumulate financial wealth, it is at least in part to be in a better position to support the people and social causes I care most.
Respect money for what it can do. Take steps to cultivate it so that you can pursue the experiences you want, but always remember to make money work for you rather than the other way around.
I didn’t bother making New Year’s resolutions this time around. Do I want to eat better, produce more, and belly ache less? Sure. I have goals just like you, but rather than pretend like January 1 was the start of a new chapter, I decided to make my goals a part of an ongoing strive to do better.
Everything outside of finances is bathed in various shades of gray. There is nothing easy about jobs, relationships, and personal health, but when it comes to money, there is always a list of things you could be doing to make your reserves a little stronger.
What are your financial goals? What do you think could be the biggest obstacles to reaching them?