The new year always prompts us to take stock of our lives and plan to be better versions of ourselves. It’s this self-examination that leads so many of us to make New Year’s resolutions, but the statistics on achieving these goals make for sobering reading.
Research shows* that around half of adults will make these resolutions, but fewer than 10% of them will manage to keep them for more than a couple of months. The top resolutions are to lose weight, exercise more, quit a bad habit or save more money. But we fail to keep these promises to ourselves, often because we aim far too high, assume that it will be easier than it is, or try to change everything all at once.
So this year, let’s focus on fixing our finances and do it in a way that works.
1. Be realistic.
No one can start saving more money for vacations, contribute (more) to your retirement plan, and spend less on non-necessities all at once. You’ll be miserable and quickly give up on all the goals. Instead of such sweeping change, focus on one goal and then subdivide that goal into short-term changes. For example, contributing more to your 401k sounds like a simple resolution, but planning for retirement is actually a complex undertaking with a number of steps.
2. Don’t forget about debt
When you examine your finances for any reason, the first thing you should look at is your debt. There are ways to restructure debt to make it more manageable, for example, by transferring credit card debt to a 0% balance transfer card. However, sometimes it’s passive management that allows debt to accumulate and stops you from increasing your savings. Raising the amount you pay off above the minimum will help to tackle the debt, especially if you don’t change that amount. For example, $50 a month may only be $1 more than the minimum right now, but as interest payments come down, it will become $2, $5 and then $10 more. Don’t decide how much you must pay—pay the amount you can afford to pay and then keep paying it until the card is paid off. Then, put the same amount into your savings. You’ve never had that money, so you won’t miss it.
3. Plan regular reviews
The new year always feels like the right time to make changes, but don’t limit your financial planning to an annual thing. Work out your budget and see how much you can contribute to savings and investments right now. Then plan a schedule for reviewing this contribution. Don’t only make adjustments when you get a raise or next new year, look at your budget every three to six months to see what’s working and what isn’t.
4. Make a sensible spending plan
Whether it’s saving for retirement or for your next vacation, there’s no point in an overly rigid approach that takes all the fun out of life. The type of budget that says you can’t spend money on anything non-essential until a certain goal is reached may help you to that goal. But you won’t be able to sustain it as a long-term budget and you’ll end up in a cycle of (metaphorical) binging and dieting. Instead, allocate a part of your budget for your goals and another sum for the fun stuff too. You’ll enjoy the money all the more when you’re “allowed” to spend it.
5. Expect the unexpected
Life throws the unexpected at you, none of us were expecting to spend most of 2020 under lockdown during a global pandemic. You can find that money you saved for your next holiday goes toward a new furnace or a hefty car repair bill. Financially smart people have money set aside for rainy day emergencies and invest in protecting against more devastating crises. Losing your job or enduring long-term illness will have a huge impact on your finances, but it can be mitigated by savings pots and adequate protection in place.
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*US News and World Reports , Dec. 29, 2015