Written by: Ryan Bouchey
As we enter the first week of the New Year I thought it may be beneficial to put together a few simple, yet highly important financial resolutions to set which are easily attainable with a little discipline. Throw away the “work out more” or “eat better” resolutions because they are no fun. My personal resolutions (in addition to the following) had to do with playing more golf and reading more books – both fun and stimulating activities. Here are some financial resolutions that I think if you start this year will help keep you on financial track for 2018 and far beyond!
- Save More – Sounds simple enough, until life happens. More bills, car trouble and the list goes on and on. It’s easier to say you’re going to save more than it is to save more based on these unexpected life events. Hopefully you have some events in 2018 that you can plan for setting set dollar amounts aside to reach a solid 10% of income savings goal. Maybe 2018 brought you a raise – if this is the case you’re already accustomed to living a certain lifestyle with your cash flow from your 2017 salary. Try and make it a point to save at least half of your raise – if not MORE if you can. This is something that you can get engrained so that as you continue to grow in your career you are benefiting current and future cash flow. Same thing with any lump sums you may be receiving early in the year – year end bonuses, tax refunds – try and put as much away as you can. This will create a habit for years to come that help you attain your long-term financial goals. Last thing to remember – most households this year will be receiving a tax break in the form of the new tax law. Have you or your accountant do a rough estimate of how much you may save next year and make a goal of putting that away. If a raise, bonus, tax refund/savings aren’t on the horizon, resolution number two may be a way to get you to save more…
- Create a Budget – you’ll be amazed at how your spending habits are effected by keeping a detailed account (whether weekly, monthly or yearly) of your spending. We work with clients on financial planning issues everyday and the most successful and retirement ready clients aren’t necessarily the highest earners – it’s those folks who have the greatest understanding of their spending and are able to save more than most relative to their spending. I find it most helpful to create a budget on a monthly basis and treat it as a game for our household spending – some months are better than others but I know what just about every dollar spent goes to. There are some great online resources or apps for your smartphone that can help and can link right to your credit / debit card to track payments – Mint or Wally are two that come to mind – although we don’t endorse either as a firm, do your homework as there are some that may be more suitable to your needs. I personally still use an old fashioned Excel spreadsheet to track my monthly budget versus my monthly actual spending. Credit card and banks make it easy to see at the end of each month which categories your spending goes to, which helps when organizing your cash flow. Everyone has their own way of doing things so do what’s works best for you – but I can assure you this will help now and for years to come.
- Separate Good Debt from Bad Debt – one of the most asked questions as a financial advisor I get is “Should I pay off my mortgage” or “Should I pay for my new house without taking a mortgage?” My answer is always – there is good debt and there is bad debt. At historically low interest rates, I view a mortgage (or car loan) as good debt and here is why. Let’s say you have $300,000 left on your mortgage and you want to pay it off. Now your interest rate may only be 3.5% which would cost your approximately $10,500 in interest this year. Now let’s take the 20 year average return off a basic 60/40 stock to bond portfolio. The return rate over the past 20 years, which let’s not forget includes two HUGE market collapses (tech bubble and housing collapse) was 6.9% through 2016. This would return you approximately $20,700 on average this year. Would you rather pay off the mortgage to save $10,500, or would you rather keep that $300,000 invested, earn $20,700 and after your interest expenses wind up with $10,200 left over? I would take the $10,200 still invested. Now if you have school loans or credit card debt – make it a point to pay these off as soon as you possibly can. These can have a tremendously negative effect on your long-term financial goals and the sooner you can pay these down the better off you’ll be. But home and car loans at these current rates may still be favorable.
- Work With a Professional – A little bit of self promotion, but as we always say “we take the emotions out of investment decisions.” 2017 was sort of a crazy year in that it wasn’t crazy at all. We saw little volatility, no downward movement over 3%, we saw no real huge jumps in the market, just a slow steady rate of return with all 12 months being up and a total return of 21.8%. Not many people would have predicted this at the start of the year and I’ve personally met with folks interviewing our firm who had been sitting in cash because their brother-in-law or previous advisor had them spooked that the world was ending once President Trump was elected. The key to long-term financial success is having a long-term approach to investing. If the emotional elements of investing are too much then it may be time to work with a professional.