Yes, it’s that time again. As New Year’s Eve approaches, it comes with the prospect of making New Year’s resolutions that we hope to finally keep this year. These resolutions usually revolve around health and finances. While I can’t help you much with the first, here are 12 ideas for financial resolutions in 2012:
1) Set goals. As Stephen Covey put it in The Seven Habits of Highly Successful People, begin with the end in mind. After all, it’s hard to know how to get to where you want to be if you have no idea where that is. Take a break from the in-laws this holiday season and ask yourself what you really want, what steps you need to take to achieve those goals, when you’d take those steps, and what they would cost you. Most importantly, write it down to hold yourself accountable and make them more likely to actually happen.
2) Plan your estate. Speaking of “the end,” this is a good place to start because we never know when we might need estate planning documents like an advance health care directive, durable power of attorney, and a will and/or living trust. These are also notoriously easy to procrastinate so it’s good to get them out of the way. You can use software or a template if your situation is relatively simple but you may still want to have an estate planning attorney look it over. For more complex situations, you’ll definitely want to hire a qualified attorney.
3) Check your credit. If you’re like most people, you’ve probably been using your credit cards all over the place for the last several weeks so keep an eye on your credit card statements for any purchases you didn’t make. You can also take it a step further and check your credit report for free at www.annualcreditreport.com if you haven’t done so in the last 12 months. You can order a copy from each of the 3 bureaus or space them out throughout the year as a way to monitor future changes. In any case, look out for errors (about 70% of credit reports have them) that could be hurting your credit and be sure to get them fixed. You can also use sites like quizzle.com and creditkarma.com to see your score for free and learn more ways to improve it.
4) See where your money is going. Now that you’ve thought about your hopes (and fears) for the future and gotten glimpse of your past through your credit report, this is where we see where you are now. Take a look at your last 3 months of bank and credit card statements then categorize your expenses on a worksheet like this to give you an average of your monthly expenses. You don’t want to include all your recent holiday binge shopping though. For non-monthly expenses like gifts and vacations, figure out how much you tend to spend on them per year and divide that number of 12. It might be a good idea to then set that much aside each month to cover those expenses as they arise. This could help you decide how much you can really afford to spend and avoid ending up in a financial hangover every January.
5) See where you can cut back. Once you know where your money is going, try to think of ways you can reduce some of your expenses to spend less than you earn every month and save for your goals. Ask yourself if there are ways of doing the same thing while spending less money. How about canceling the subscription to that magazine you never read? Can you bring lunch to work instead of eating out every day? Do you really need to drink Starbucks every morning? Here are some other money-saving ideas.
6) Make sure you have the right amount of insurance. You want to have enough disability insurance to cover your necessities and enough life insurance to provide for anyone dependent on your income. Don’t forget to check what you have available through you and your spouse’s employer. This is also a good time to examine your health and property and casualty insurance coverage too.
7) Build an emergency fund. There are always those expenses we can’t plan for like the roof needing repairs or the car breaking down and not all of these costs are covered by insurance. That’s why it’s so important to have some cash somewhere safe and accessible like a savings account or money market fund. Try to save at least $1k and ideally 3-12 months worth of necessary expenses in case you or your spouse were to lose your job. The riskier your income is, the more you should have in savings.
8) See if you can refinance your debt. One expense that no one likes to pay is interest. With rates near record lows, this can be a great time to see if you can consolidate student loans or refinance your mortgage to a low, fixed rate before rates eventually start moving up. If you were able to improve your credit score, you might also qualify for rates you weren’t able to in the past.
9) Pay down bad debt. There are some debts, like credit cards, that you generally can’t permanently refinance below what you can expect to earn by investing your money. In this case, your best bet is to try to pay them down aggressively by focusing all the extra payments on the balances with the highest interest rates. As one debt is paid off, you’d then apply those payments to the next highest interest rate debt. You can use this calculator to figure out how long it will take you to become debt free using this strategy.
10) Get on track for retirement. If your employer offers a retirement plan with a match, try to contribute at least enough to get that full match so you don’t leave any free money on the table. You should also be able to contribute the extra 2% of income from the recently extended payroll tax cut. Since it’s temporary, you don’t want to get used to spending it. After that, you can calculate how much more you need to save (especially after all the market turmoil over the last few years) with this retirement estimator. You can then get additional tax benefits by contributing more to your employer’s plan, a traditional IRA, and/or a Roth IRA. Don’t forget that you will be able to contribute more to your 401(k) next year and that you have until April 15th to contribute to IRAs for 2011.
11) Consider saving for education. Your kids can borrow for school but there’s no financial aid for retirement so that should be your first priority. But if your retirement needs are on track and you’d like to put some money away for future education expenses, look into various tax-advantaged vehicles like state 529 plans, Coverdell Education Savings Accounts, and U.S. savings bonds to see which best fits your needs. You can learn more at savingforcollege.com.
12) Make sure your investment portfolio is properly diversified. In addition to saving money for retirement, education, and perhaps other goals, you’ll still need to decide how that money is invested. Rather than try to predict the market, you can use this risk tolerance questionnaire and asset allocation worksheet for guidelines on how much to invest in stocks, bonds, and cash based on how long the money will be invested for your goals and how comfortable you are with the ups and downs of the market. You would then re-balance your portfolio periodically to keep it in line with your strategy. This can also help you resist the temptation to buy stocks when they’re doing well (priced relatively high) and sell stocks when they’re doing poorly (priced relatively low).
There are quite a few steps here to choose from and not all of them will necessarily apply to you but taking even just one or two of these steps can help put you in a better financial position. Do all 12 and the only thing you may have left to work on is sticking to your diet and getting back to the gym. These don’t seem so bad now, do they?
Liz Davidson is CEO of Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff Certified Financial Planner™ professionals. (Compliments of Forbes.com)