A couple of weeks ago, I suggested 14 possible financial New Year’s resolutions for 2014. Of course, the problem with New Year’s resolutions isn’t making them. It’s following through. One study showed that most resolutions don’t last past 6 months. Perhaps for that reason, over a third of people don’t even bother to make any.
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While losing those last 5 lbs may feel like a lost cause, losing that last $5k in credit card debt may feel more urgent. So how can you make sure your financial resolutions stick and turn into lasting change? Here are some pitfalls to avoid:
1. Not setting SMART goals
One of the main reasons that New Year’s resolutions go unfulfilled is that they’re too vague. Saying you want to lose weight isn’t as good as saying you want to lose 10 pounds by the first day of summer. At the same time, those goals should be realistic. Setting a goal of losing 10 pounds in a week just sets you up for disappointment and discouragement.
The same is true for our financial resolutions. Each financial goal should be SMART (specific, measurable, attainable, realistic, and timely). Want to pay off debt? Build an emergency fund? Save more for retirement? How much and by when?
Finally, when setting realistic goals, keep in mind that we tend to overestimate what we can do in the short run and underestimate what we can accomplish in the long run. Set some lofty and inspiring long-term goals. Then break them down into manageable and achievable action steps.
2. Being paralyzed into inaction
In many ways, financial planning is really all about prioritization. After all, we have limited means to satisfy seemingly unlimited goals so we have to make trade-offs. Are you willing to spend less eating out now so that you can retire earlier in the future? Should you pay down debt or build up savings first? Is it worth taking more risk for a higher potential return on your investments?
But even the perfect financial plan is worthless if it’s not actually implemented, which too often is the case. Whether you’ve attended an educational workshop or had a customized plan put together by a personal financial advisor, it’s easy to feel overwhelmed by all the things you need to do. This is especially true if those actions steps involve making complex choices or if the benefit is delayed, which is usually the case in financial planning.
The key is to prioritize not just your money but your time, focus, and attention. Pick your top 3 goals for the year and focus on a small number of attainable action steps. A good financial planner can help here but if you’re on your own, here’s a guide to prioritizing your savings goals.
3. Ignoring future saving opportunities
Regardless of your financial priorities, chances are at least one of them involves saving more money. In fact, spending less and saving more was the most common financial resolution this year. Although there are a variety of relatively painless ways to reduce our spending, the reality is that too many of us just aren’t going to make those changes.
Fortunately, there is a potential solution. In a study by behavioral finance researchers Shlomo Benartzi and Richard Thaler of real retirement plan participants, only 28% of employees were willing to immediately increase their savings based on a financial advisor’s recommendation. However, 56% were willing to increase their savings by 3% per year in the future. More importantly, 80% kept their commitment after 4 years and they went up dramatically from a 3.5% savings rate to a 13.6% savings rate compared to the 8.8% savings rate of those who followed the advisor’s initial recommendation. This approach can be particularly useful if you have a lot of time and many peak earning years ahead of you.
Check to see if your retirement plan provider offers a feature called a “contribution rate escalator” in your retirement plan. If so, you can set the escalator to automatically increase your retirement plan contributions over time. If not, you’ll simply need to gradually increase your contribution rate each year. Either way, you probably won’t even feel it in your paycheck but pretty soon you might be saving more than you ever thought you could. In fact, there’s a book called The Automatic Millionaire that shares real stories of regular people who have become millionaires using this strategy.
Setting goals and creating a financial plan is just the first step. More important are the actions you take and the habits that eventually develop from them. That’s what causes lasting changes and avoids another year of New Year’s resolution disappointments.
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.