5 Financial Resolutions to Consider This New Year
MIN READ 4
The end of the year is a good time to take stock of your financial condition and form resolutions to improve it in the new year. The power of resolutions is their specificity: You can make concrete goals with outcomes you can measure. You can use tools such as budgets and portfolio managers to help you understand your current finances, set goals and monitor your progress toward success.
Prepare for the Unexpected
If you haven't done so yet, establish a fund with enough money to sustain you and your dependents for six months should you lose your job or have an emergency. Invest the fund in stable, liquid securities like a money market account or short-term U.S. Treasury bills. The peace of mind an emergency fund provides is hard to quantify. Beyond that, according to financial consultant Jeff Looby, "Building an emergency fund requires discipline, foresight and the ability to delay gratification. It provides powerful lessons in prioritizing your spending and avoiding spur-of-the-moment purchases."
Run the Numbers
Establish a budget and use it to guide your behavior. You can easily set up a budget in Quicken and track it with your actual income and expenses. Quicken allows you to integrate all your accounts, set up recurring bill reminders and payments and report your status at the touch of a button. If you created budgets in the past and then ignored them, try adopting a measured approach. For the first month, monitor the cash flows of only two areas, such as cash spending and dining out. Get into the habit of making daily entries and reviewing your spending habits. Then start tracking other areas until you are accounting for all your income and expenditures.
Learn to Evaluate Your Purchases
Compute the total cost of ownership before buying big-ticket items. Looby explains that total cost of ownership, or TCO, includes all the costs associated with a big purchase, including interest if the purchase is financed, cleaning and maintenance costs, insurance and taxes. "For example, the TCO of a new boat is not just the sticker price but may include the annual insurance costs, sales tax on the purchase, fuel and supplies, additional equipment, communications/satellite fees, dockage fees, yacht club membership and interest on the financed portion of the purchase," Looby says. Knowing the TCO up front allows you to verify that your budget can handle the purchase without compromising your other financial responsibilities, such as saving for your retirement.
Increase Your Financial I.Q.
Resolve to learn one new financial skill in the upcoming year. Knowledge is the key to better decision-making and unlocks all sorts of possibilities. The first step is determining which new skills will yield the most value. For example, if you have children, you might want to learn about alternative ways to pay for their education. According to the College Board, annual in-state public undergraduate college costs in 2013-2014 were $18,391, while the figure for private colleges was $40,917. These numbers might motivate you to learn how to use trusts, education savings accounts, 529 plans, U.S. savings bonds and unified transfers to minors accounts to build an education nest egg and obtain important tax advantages. Similarly, you might want to find out more about retirement accounts, estate planning or tax-advantaged investing -- whatever seems appropriate to your situation. If you're not sure where to begin, seek guidance from a financial planner or other qualified professional.
Review Your Tax Withholding
Take a fresh look at the amount you have withheld from your paycheck. According to Looby, "There is some value to over-withholding your taxes every year, because it becomes a forced saving mechanism." He advises that you use your tax refund to support long-term savings goals rather than using it for a vacation or some other one-time expense. You also may want to adjust your withholding because of recent or upcoming life events, such as getting married or divorced, having a child, switching jobs, moving or sending a child to college. By increasing your tax withholding, you can use your tax refund to pay for the big events awaiting you.