Photo by Nagatoshi Shimamura on Unsplash
Financial goals frequently top the list of New Year’s resolutions for many people. In my case, I have resolved (again) to get a better handle on exactly where our money goes each month.
Yes, I know. You would assume that as a financial planner I know is how every penny is spent, that I pour over spreadsheets every weekend and that all my expenditures are automatically uploaded to a software program that tracks it all.
In reality… not so much.
I am very good at long-term planning. I know exactly what how much I save and invest. My cash reserves are more than adequate, and I am on track to meet our family’s financial goals. In other words, I am great at handling the big picture. But I am less than great at handling the finer details of how we spend our money.
Earlier in my career, I believed that as long as you had an adequate cash reserve, maintained minimal debt, and were saving enough to meet your long-term financial goals (or at least 15% of your income), you were good to go. It didn’t really matter what you spent the rest of your money on as long as you were setting aside what you needed for the future and avoiding the big mistakes like credit card interest or missing out on the company 401k match.
While that is still a good strategy, I think a bit differently now. I believe that by being more aware of how you spend your money, less of it goes down the drain and more of it stays in your pocket or at least gets spent in better ways.
What are your financial resolutions for the new year?
Here are a few to consider:
Take a deep dive into how you spend your money. As noted above, this is at the top of my list. When I ask people how much money they need to spend in retirement, they often have no idea. When I ask how much they spend today, I usually get a similar response. So, I know I am not alone.
Knowing how you spend your money and where it goes is the first step in making your money go farther.
Make an IRA contribution. 2020 say an increase in the average savings rates for many Americans. 2021 may be the year to start a new IRA or add to an existing one.
The IRS allows people age 50 and older to contribute up to $7,000 to an IRA if they have earned income from a job. If that extra savings is burning a hole in your pocket, use it to fund your 2020 IRA before you file your taxes or April 15, whichever comes first.
Already have an IRA? Put it on autopilot and establish a systematic, monthly contribution. This way your IRA is automatically funded, and you never have to worry about coming up with the money at the end of the year.
Increase your 401(k) contribution. At a minimum you should add enough to your 401k to get the full benefit of your company’s 401(k) match. Once you meet that basic threshold, increase your contribution as much as reasonably possible. The ultimate goal is to fund your 401k at the maximum level allowed by your employer and the IRS (2021 IRS 401k max for a person over age 50: $26,000).
Review your insurance needs. Maybe you are spending too much here; maybe not enough. Maybe you don’t have the right type of insurance. Typically, people by insurance when their kids are young and the mortgage balance is at its greatest. As time goes on your insurance needs change.
Don’t stop with just your life insurance. Review your homeowner’s policy as well. I recently met with a client who told me she saved over $2,000 off her car/homeowner’s insurance by reviewing and updating her policies.
Meet with your advisor and/or agent to review your insurance needs.
Create a will and other estate planning documents. Does the executor of your estate have everything they need to manage your affairs if you die tomorrow? An attorney I work with once said, “The best time to update your will is any time before you die”. The problem is we don’t really know when that time will be.
Update your will and trust documents now.
Review your beneficiary designations. Generally, most people list their spouse as primary beneficiary on their retirement accounts and insurance policies. They list adult kids, other individuals or trusts as “secondary beneficiaries” where appropriate. Beneficiary designations can be changed at any time as the account owner is alive. Once a person dies, however, the beneficiary designations are set in stone.
Get your beneficiary designation in writing and double check that it is in line with your current estate planning wishes.
Give more. Or at least give smarter. Most people give at least some money to their church or favorite charities. Are you doing so in a way that gives you the best tax advantages or leverages your gift as much as possible? Perhaps gifting appreciated assets like stocks or mutual funds, bunching charitable contributions into high income tax years, establishing a Donor Advised Fund, or taking a Qualified Charitable Distribution from your IRA makes more sense.
Talk to your financial advisor or tax professional about being more tax-smart with your giving.
Create or update your financial plan. If you are a client of mine, you are already good to go. I update financial plans for clients on a regular basis and review them with clients twice per year. Staying up to date on your financial plan is a great (I think the best) way to avoid major financial mistakes, stay focused on your long-term financial goals, and adjust your plans as needed.
Not working with a financial planner? Call me and I can point you in the right direction.
This is a long list and getting longer. Most of these suggestions are pretty obvious, yet just like my resolution to get a better handle on my personal spending, these suggestions typically remain undone year after year.
This year, pick one and get it done. I’ll go first.