Top 10 Financial New Year's Resolutions You Can Actually Stick To
The New Year is the perfect time to start thinking about ways to improve your finances. Whether you’re just getting started or you’re looking to improve from what you have already been doing, here are a list of ideas to help boost a few areas of your financial life.
1. Calculate Your Net Worth
Why is it that we are so intrigued with the net worth of celebrities, athletes and billionaires, but we never take the time to calculate our own net worth?
The most-likely answer is it may be one of the most humbling things we can do when it comes to personal finance.
Your net worth is a very simple calculation to measure wealth. To calculate your net worth, simply add up all of your assets (the things you own) and subtract all of your liabilities (the things you owe).
Typical assets may be any cash, savings, retirement accounts, your home, automobiles, collectibles, and jewelry.
On the other hand, liabilities are any debts you have. This could be the mortgage on your home, auto loans, credit cards or any other loans you may have.
Let’s take a look at a quick example:
|Home||$350,000 value||-$300,000 (loan balance)|
|Total Vehicle Value||$40,000||-$35,000 loan balance|
|Total Credit Cards||N/A||-$5,000 balance|
2. Create a Budget
What gets measured also gets managed.
Think about this: What if a business just guessed or estimated how much it takes to pay employees, keep the lights on, manage inventory, and set aside for taxes?
It’s not hard to imagine that the business would be out-of-business.
This same principle applies to our own personal finances.
When you create and stick to a budget, you are telling your money where to go instead of wondering where it went each month.
3. Review Your Subscriptions
Now that you’ve created a budget, you may have noticed a few things you have been paying for that you’re no longer using.
These “gray charges” have become increasingly common with premium apps you can download on your phone, subscriptions to channels via your television or even free 7-day trials you forget to cancel.
To find these unused subscription charges, also called “gray charges”, print off the last 90 days worth of bank statements and identify what you’re charged for that you’re no longer using. You can also automate this process by using subscription trackers like Rocket Money and Trim.
4. Build Emergency Fund
One of the top reasons people will go into high interest credit card debt is because they didn't have the money to cover an unexpected financial expense — AKA, an emergency.
According to author Stephen Covey’s book The 7 Habits of Highly Successful People, the number one habit highly successful people possess is that they are proactive. Instead of reacting to whatever life throws at them, the most successful people are already prepared when life happens.
To start, save $1,000 as quickly as you can. The reason we start with $1,000 is because about 95% of life’s problems can be solved with $1,000.
Once you have your $1,000 emergency fund started, finish the remainder of your emergency fund with 3 to 6 months' worth of emergency expenses.
Add up all of the necessary expenses you must cover if you were currently inside a financial crisis and then multiply that amount by 3 to 6 months.
Hint: Think about needs versus wants. You may want to go out to eat with friends but you need to pay the rent.
When you build an emergency fund, your next financial emergency will feel less like a crisis and more like a financial bump in the road.
5. Pay Down Debt
Debt is the one thing that will always hinder your ability to build wealth.
When you remain in debt, you continually pay interest on your debt which increases wealth for someone else instead of building wealth for yourself.
What would it look like over time if you traded debt payments to pay yourself first?
Let’s take a look at a quick example:
As you can see, debt robs you of your ability to build wealth.
How to Pay Off Debt Quickly
There are two great ways to pay off debt using either the debt snowball or the debt avalanche method.
When using the debt snowball, line up all of your non-mortgage debts from smallest to largest balance. Then, make minimum payments on all of your debt and attack the smallest debt with every extra dollar you can find.
After you quickly pay off the smallest debt, roll that amount into the next debt on your list. Rinse and repeat this process so when you get to the last debt on your list, you’re attacking your largest debt with a large amount each month.
The debt avalanche uses the same principle, however this time you will line your debts up in order of largest to smallest interest rate, making minimum payments on all debts, and paying your highest interest rate debt first.
The debt snowball focuses on the behavior with money where the debt avalanche focuses on the math.
6. Pay Yourself First
Most people will get their paycheck, cover all of their expenses, and then set aside whatever is left over for savings. In fact, building savings or investing for retirement is often at the end of someone’s budget.
Paying yourself first simply means reversing the order of savings. Instead of setting aside what is leftover, you instead save first and then allocate what is leftover to cover the rest of your expenses.
Instead of paying Visa, MasterCard or Amazon first, you pay yourself first.
7. Start Investing
Many people are completely overwhelmed when it comes to investing. They don’t know where to start, what to invest in, or how much they should even start investing. The good news is investing does not have to be complicated and it’s extremely simple to get started.
If you currently have an employer that offers a 401k plan (or possibly a 403b, 457, 401a or Thrift Savings Plan), then contact your HR department and enroll in your company’s plan if you haven’t already done so. Also, many employers will offer a company match — which means they will match up to a certain amount of whatever you are willing to invest.
This match is free money!
If you don’t have an employer sponsored plan because your employer doesn’t offer one or because you’re self-employed, you still have some great options.
You can start your own Traditional IRA or ROTH IRA at any online brokerage firm or you can also open one at your local bank or credit union.
The bottom line is it has never been easier to get started investing for your future than right now.
8. Start College Savings
Maybe you have children and you’re beginning to wonder how you’re going to pay for college when that time comes?
Starting a college savings plan is a great solution to setting money aside for college while also receiving a tax break for doing so.
Saving money for college in a 529 plan allows the earnings to grow tax-free and the money will not be taxed when withdrawn to pay for college expenses.
In addition, there are currently a handful of states, including Arizona, that also offer a tax deduction or credit for saving into a 529 college savings plan.
9. Get Life Insurance
One of the most-overlooked areas when it comes to personal finance is life insurance.
Life insurance can do many things, but the main purpose of life insurance is to replace your income if you were to unexpectedly pass away.
Ask yourself this question: How does the mortgage, the rent, the bills, and everything else get paid if I were no longer here to provide an income?
However, if you don’t work outside of the home and you are a stay-at-home parent (SAHP), you still provide economic value and therefore you still need to have life insurance.
Ask yourself this question: Who becomes the childcare provider, the teacher, the cook, the driver, the housekeeper, the coach, the tutor, provides laundry services, and does all the other things required to manage the household?
Whoever that person is will cost money, and that money comes from your life insurance policy.
A good rule of thumb is to have between 10-12x your income of Term Life Insurance if you work outside of the home and between $250,000 and $500,000 Term Life Insurance if you are a stay-at-home parent.
You can purchase term life insurance directly through the insurer or through an online insurance broker such as Policy Genius.
10. Create a Will
According to a recent study, nearly two-thirds of Americans don’t have a will.
This means that nearly two-thirds of Americans are leaving some of life's most difficult decisions to be made by the local courts instead of those who know and love them the most.
In fact, if you pass away without a will, your loved ones are left to pick up the pieces with the added stress and burden of trying to decide what your final wishes would be. All of that goes away when you create a will.
A will decides:
- Who will be the manager and executor or your estate
- Who will take care of your children
- Who will take care of your pets
- Who will get your property
- Any wishes you had for your funeral
You can also create a will in person through a local attorney in your area.
Challenge: Commit to One of These
Alright, you have made it through the entire list and you may be feeling a little overwhelmed. If this is you, then just pick one of these from the list above and stick to it.
The good news is when you decide to improve in just one area of your financial life, the chances are that it will spill over into other areas of your finances as well.
Chris “Peach” Petrie is the founder of Money Peach. Money Peach partnered with OneAZ to provide free financial education to members across the state. To learn more about OneAZ’s partnership with Money Peach, click here.
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APR = Annual Percentage Rate