The New Year is a time when we can consider the year that has just passed, consider our lives, and resolve to improve our circumstances. For many of us, this means making New Year’s resolutions. The key to making effective resolutions seems to be stating clear goals or changes that can lead to a demonstrably improved result. Some of the most effective New Year’s resolutions for self-improvement come in the area of personal finance.
Here are a few simple suggestions for resolutions in the New Year that may help improve your financial life.
Likely the most important financial New Year’s resolution is to create a household budget. Budgeting often seems like a difficult task and people think the outcome is merely a dreary restriction on spending. But a personal budget can be the key to getting finances on track and making a basic budget is actually quite simple. Start by stating expected after-tax income each month. List recurring income from all sources, like work and investments. Then list all fixed expenses in the household, such as housing costs, utilities, car payments, and other recurring bills. Comparing expected income to fixed expenses will reveal how much is left for savings and discretionary spending each month. Dedicate yourself to set aside a certain portion of your surplus every month to savings, either in an emergency fund or as savings directed at a specific financial goal. The remaining money can be used for discretionary spending. The real value of budgeting is to know how much is available for such discretionary spending and to make sure not to exceed that budgeted amount. Preparing a budget like this is an effective step to help us live within our means and put ourselves on a healthy financial trajectory.
The next resolution is to carefully and thoughtfully manage debt. Debt is not inherently good or bad and it is generally an unavoidable part of financial life. But, for a healthy financial life, it is important to keep debts at a manageable level and to not be dragged down by them. The most important step to managing debt in the modern economy is to fully pay off credit card bills every month. Large and growing credit card debt can be a major financial problem and can lead to difficulties down the road. Consider credit card payments as part of monthly cash flow and do not use them to spend more than budgeted every month.
To help reduce current debt loads, consider making extra principle payments on existing debts, like mortgages and student loans. Paying down debt faster can reduce the total amount of interest paid and free up more money in the future. In addition to reducing current debt, always carefully consider any new debts. A new debt is not inherently bad, but debt should always have a purpose, like purchasing a new home or starting a new business. Debt, especially credit card debt, merely for the sake of discretionary spending, can be a dangerous habit. Before taking out new debt ask what the debt is for, is it necessary, and how is it going to be repaid.
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Finally, set clear financial goals and save money towards them to make them realities. Whether it is early retirement, funding a child’s education, or taking a trip around the world, there are many worthwhile goals for our finances. With a little forethought, there is a simple strategy to make these goals realities. First, state the financial goal clearly, how much money is needed to attain the goal, and when the spending will take place. Then select a savings tool for the goal. For most goals, a savings account at a bank, like First Bank, is a good instrument, however, many specific goals have special savings structures, like a 401(k) for retirement or a 529 plan for education, that may include extra benefits. Set up automatic contributions to the chosen savings accounts regularly and do not touch the funds as they continue to grow.
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Finally, when the time is right, use the savings to meet the stated goal. Clearly stated financial goals, consistent savings, and a little discipline can help us make the most of our money, avoid debt, and attain our lifetime financial objectives.
Are you ready to establish a roadmap to help get you to your goals and prepare for your future? Reach out to a knowledgeable First Bank Wealth Management Advisor today.
By: David Frederick
|David Frederick, J.D., LL.M. is the Senior Vice President and Director of Client Success and Advice at First Bank Wealth Management and Adjunct Professor of Economics at Washington University. David may be reached by phone at 314-995-8764 or via email at David.Frederick@fbol.com.|