Do you have any financial resolutions for New Year’s this year? Despite evidence of declining financial wellness, a recent survey showed that only 16% of Americans intend to include financial planning in their New Year’s resolutions, down by more than half from the 33% in 2009 who said they would make it a high priority in New Year’s resolutions. So if you’re a bit heavy (pun intended) on resolutions related to the size of your waistline and light on ones relating to the size of your bank account, here are 14 possible financial planning actions you can resolve to take in 2014:
1) Make a budget.
Yes, the “b” word. It’s the financial version of a diet and just as important to your financial health as eating right is to your physical health. Start by looking at your bank and credit card statements for at least 3 months and record your expenses on a worksheet like this. If you’re spending more than you have coming in or aren’t saving enough to reach your goals, see if you can use any of these money-saving tips to reduce some of your expenses.
Like a diet, a budget is only as good as how well you stick to it. Consider using a cash management site like Mint or Yodlee MoneyCenter to monitor your spending online for free. If you don’t want to track every nickel and dime, you can also give yourself a fixed weekly or monthly allowance for discretionary expenses like shopping, eating out, and entertainment.
2) Check your insurance coverage.
Insurance involves things we don’t like to think about but we never know when we might need it and by then, it will be too late.With the Affordable Care Act coming into effect, there’s no longer an excuse not to have health insurance and there will now even be a penalty if you don’t. But don’t stop there. Make sure you not only have auto and homeowners or renters insurance but also consider umbrella liability insurance, especially if your assets exceed the liability coverage provided by your other property and casualty policies. See what coverage you get for disability and life insurance from work and Social Security and purchase supplemental coverage if you need more. Finally, if you’re in your mid-50s to 60s and have $200k-$2 million in assets outside of your home, you may want to consider purchasing long term care insurance.
3) Update your estate planning documents.
Not old or wealthy enough for estate planning? Think again. Estate planning is about more than avoiding estate taxes on multimillion dollar estates. Draft an advance health care directive and a durable power of attorney to make health and financial decisions respectively if you’re incapacitated. In addition to who inherits your assets, you’ll also want a will to designate who could become the guardian of your minor children. Check to see that beneficiaries on your retirement accounts and life insurance policies are up-to-date and see if your state allows you to add beneficiaries to your bank and investment accounts and even your home and car to avoid the time and cost of probate on those assets for your heirs. You might also want to hire an estate planning attorney to at least review and update any documents you do yourself or to draft a trust if you still have a lot of assets that will pass through probate
4) Build up an emergency fund.
Ideally, you’ll want enough in cash (and maybe even food) reserves to cover necessary living expenses for at least 3-6 months. One place to consider stashing some of the cash is a Roth IRA. That’s because you can access the sum of your Roth contributions at any time and for any reason without tax or penalty. Whatever you don’t withdraw, can grow to be tax-free for a first-time home purchase (up to $10k) or retirement (after age 59 1/2). Just be sure to keep the Roth IRA somewhere safe like a bank account or money market fund until you have sufficient savings outside of it. At that point, you can invest it more aggressively for long term goals.
5) Pay down high interest debt.
If you have debt with interest rates over 4-6%, you’ll probably save more by paying down the debt than you’ll earn by investing that money. Start by seeing if you can refinance or negotiate down your interest rates. Then make additional payments towards the balance with the highest interest rate. As one debt is paid off, put those payments towards the remaining debt with the next highest interest rate. You can use this calculator to see how quickly you can become debt free using this strategy.
6) Protect your credit.
The most important things you can do to maintain a good credit score are to make timely payments, keep your debt low relative to your credit available, and avoid closing old accounts or applying for too much new credit. But according to a recent study by the Federal Trade Commission, millions of Americans also have errors on their credit reports that could be causing them to be denied credit, charged higher interest rates and insurance premiums, and even lose out on a new job or promotion. Even more disturbingly, over 16 million Americans became victims of identity theft last year.
What can you do protect yourself? Be sure to check each of your 3 credit reports for free every 12 months on AnnualCreditReport.com and be dispute any errors you may find. To protect yourself from identity theft, you can get free credit monitoring on sites like Credit Karma and Credit Sesame and place a security freeze on your credit reports to prevent anyone from opening credit in your name without a PIN that you set up.
7) Buy a home you can afford.
Home ownership allows you to be the king or queen of your own castle while providing the financial benefits of being able to deduct some of your housing costs, build equity, and own an asset that can generally appreciates over the long term. But as we learned during the real estate bubble and financial crisis, the key is not buying more home than you can comfortably afford. If you don’t already own a home, see these 7 steps to prevent your piece of the American Dream from turning into a nightmare.
8) Plan for retirement.
80% of employees who have taken our financial wellness assessment report not being on track for retirement. If your employer offers you a match on your contributions, at least contribute enough to max it out so you don’t leave any of that free money on the table. Beyond that, you’ll want to calculate how much you need to save to reach your retirement goals. But with any calculator, it’s garbage in/garbage out. Be sure to factor in the possibilities of reduced Social Security benefits, lower real investment returns, longer life spans, and higher health care costs in retirement.
9) Save for education expenses.
With rising student loan debt in the news, saving for college is understandably a rising concern. However, make sure that your retirement is on track first because there’s no financial aid for that. In addition, understand that very few people are able to save enough to fully fund all education costs from savings so don’t let those numbers discourage you. You can start by estimating how much you would need to contribute to your child’s education expenses so you can calculate how much to save.
10) Take advantage of tax shelters.
By using tax-sheltered accounts, Uncle Sam can help you save towards various goals. Your company may offer flex spending accounts to put money away tax-free for dependent care and health care expenses but be aware that you may lose whatever you don’t use by the end of the year. If you have a high-deductible health care plan, a health savings account can let you save and accumulate money tax-free for health care expenses (and for anything penalty-free after age 65). Your employer’s retirement plan and IRAs allow you to put money away tax-deferred or invest it to grow tax-free for retirement. Coverdell education savings accounts and 529 college savings plans allow tax-free earnings for education.
11) Make sure your investments are properly diversified.
The biggest factor in determining the risk and return of your investment portfolio is your asset allocation or how your money is divided between basic asset classes like stocks, bonds, and cash. A simple way to a diversified portfolio is to invest in pre-mixed asset allocation fund. Some are based on a fixed level of risk while others reduce automatically reduce the risk level over time as you approach your target date for goals like retirement or education.
If you prefer a more personalized approach, see if your employer or retirement plan provider offers unbiased asset allocation guidance through a financial education company or advice through programs like Financial Engines and GuidedChoice. There are also low cost providers of online investment advice like WealthFront, Future Advisor, and Personal Capital. Finally, if you want your investment advice as part of a more comprehensive financial plan, you can find an unbiased investment adviser through groups like the Garrett Planning Network or the Alliance of Cambridge Advisors.
12) Minimize your investment costs.
Studies have shown that low fees are actually a better predictor of future mutual fund performance than past performance or even Morningstar ratings. To minimize mutual fund fees along with taxes and other trading costs, consider implementing your asset allocation plan with low cost index funds that simply track the market and generally end up outperforming more expensive actively managed funds. You can further minimize taxes on your investment income by keeping tax-inefficient investments like taxable bonds, REITs, commodities, and high turnover funds in your tax-sheltered accounts as much as possible.
13) Harvest tax losses.
Although this year looks like another good year in the stock market, you may have some investments in taxable accounts that have lost value. By selling them at a loss, you can use the losses to offset other taxes. Just don’t repurchase the same investment within 30 days or you won’t be able to deduct the loss.
14) Treat yourself and those you love.
Finally, don’t forget that the ultimate purpose of money is to provide for the needs of you and your family. How you do it is important though. Once your needs are taken care of, meet some of those wants with a vacation or occasional outings that let you spend more time together. Studies show that spending money on experiences creates more and longer lasting happiness than spending on material purchases.
Which of these actions will you resolve to do? Do you have others not on this list? In any case, leave your thoughts in the comments section below and have a Happy New Year!
Erik Carter, JD, CFP® is a senior resident financial planner at Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff CERTIFIED FINANCIAL PLANNER™ professionals. For additional financial tips and insights, follow Financial Finesse on Twitter and become a fan on Facebook.