A recent poll of 2,000 people revealed the top ten New Year’s Resolutions; saving more was one of the top resolutions cited and one of the top five resolutions that people fail. Studies show that 80% of us will give up on our resolutions by the second week of February-but you don’t have to be part of the crowd. When it comes to improving your financial planning habits, it’s important to establish a foundation that helps you stick with your goals. Below are five steps to crushing your financial resolutions in 2020:
1. Get out of debt—or at least get a handle on it!
Debt can be the biggest roadblock to financial security. According to Nerd Wallet, the average indebted American household has about $136,000 of debt, with the majority of that in outstanding mortgages (although this varies by age). Credit card debt continues to be an obstacle to saving as the average household with credit card debt carries a $6900 balance. These numbers can seem daunting and achieving any type of financial security an impossibility - -but don’t despair!
- Credit card, car loans or other types of consumer debt usually come with high interest rates. Learn about your interest rates and try to pay off the debt with the highest interest rate first.
- Call the credit card or loan company and see if they will work with you to lower your interest rate and/or develop a manageable payment plan. There are also some consumer nonprofits that work with consumers to help consolidate their debt.
- While you pay off debt, pay more than the minimum payment in order to get that debt off your back faster.
2. Establish an emergency fund
Once you have a handle on your debt, focus on saving for an emergency fund, which should total about 6 months of necessities, enough to pay rent/mortgage, car payments, utilities and other bills, food and other needed costs.
- You don’t necessarily have to be completely debt-free to start saving for an emergency fund, even if you’re squirreling away $25 a week. Focus on paying off high interest debt, developing a manageable payment plan on your overall debt, and then start saving gradually towards the emergency fund.
- A recent study found that 69% of Americans don’t have $1000 saved in case of emergency, a scary discovery as unexpected costs pop up all the time, like a job loss or car repair. The more prepared you are, the better you can handle life’s financial ups and downs.
- An emergency fund can also keep you from liquidating stock at inopportune times or taking a loan out of your 401(k).
- For entrepreneurs and small business owners, an emergency fund can help to provide security during uncertain times. If you do have to dip into the emergency fund to pay a business cost, make sure to replenish it as soon as possible.
3. Save well in a retirement plan
One of the best ways to save is through an employer-sponsored retirement plan like a 401(k) or 403(b).
- With 401(k) or 403(b) plans, your pre-tax contribution is invested—usually in a mutual fund or target date fund—and grows tax-deferred. In retirement, you’ll pay income tax on the distributions, but you will likely be in a lower tax bracket at that time.
- If your employer matches employee contributions, make sure to contribute at least up to the match.
- For small businesses or solo practitioners, consider opening retirement accounts tailored for fewer employees to save on start-up and administration costs.
- In 2020, you can save up to $6000 of after-tax money ($7000 if over age 50) in a traditional IRA (portions of your contribution may be deductible based on annual income).
- A SEP IRA is set up to benefit the employer and employees, and requires that the employer make contributions for all employees.
- A SIMPLE plan is used for businesses with fewer than 100 employees and is less expensive to set up than a 401(k).
- Some solo practitioners may consider a solo-401(k) which allows an individual to defer up to $57,000 of his/her income in 2020.
4. Hire a financial advisor
If you don’t already have one, a financial advisor is key to helping you achieve and CRUSH your financial planning goals. A qualified financial advisor can help you develop a plan based on your investing and lifetime goals, and establish steps along the way to help you reach your goals.
- Be aware that most CPAs, lawyers or tax professionals are not financial advisors. While some advisors can help with preparing taxes as well as provide financial planning advice, many accountants and CPAs can give you tax advice but not financial planning advice.
- Understand how your advisor will be paid. Some advisors get paid on commission when they sell you a financial product, such as a mutual fund, annuity or ETF. Other advisors charge a fee (usually .50-2%) of the assets that they manage.
- The wealth threshold for hiring a financial advisor used to be quite high--most advisors require a $500,000 investment minimum in order to work with a client. Some progressive advisors offer services for a flat fee, hourly or subscription-based which allows clients to get the advice they need for a reasonable fee without a minimum asset requirement.
5. Get your affairs in order
Whether it’s developing a household budget, establishing a will or living trust, or reviewing beneficiary designations on your retirement accounts, consider setting aside time to create and review these documents with your advisor and family.
- A recent study found that only 40% of Americans use a household budget to help manage finances. A budget doesn’t have to be a complex, 200-page dissertation: keep it simple, clear, actionable and changeable—and review it often as life and your goals change.
- The beginning of the year is a good time to review your estate planning documents. These include retirement accounts or annuity contracts that list a beneficiary, a living will or trust, title to property and power of attorney documents.
Time flies when you’re having fun. Take proactive steps towards reaching your financial goals and make 2020 the year you crush your resolutions.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, a Registered Investment Advisor. Conte Wealth Advisors and Cambridge are not affiliated. 2009 Market Street, Camp Hill, PA 17011