It’s the first full week of 2016, and already many people have lost the excitement around their New Year’s resolutions. If you work out anywhere—the gym, the beach, the tennis court—you see it every year: you need bona fide crowd control in the first week of January. By week two, you can see through the swarm. By week three, things are back to normal (except that the gym is a bit richer after raking in all those well-intentioned new memberships).
Luckily, when it comes to financial resolutions, they can be much easier to keep than a new workout routine—as long as you set realistic goals, create a plan, and stick to it. The movie The Big Short does a fantastic job at calling out how complex and complicated the world of finance can be. Highly quantitative, there are aspects of it that only statistical geniuses can truly comprehend. But real financial wisdom is pretty simple. Not easy, but simple. Sticking to your plan often requires taking a step back from the financial wizardry and the ubiquitous financial “news” and applying some good old common sense.
My great friend Rick Kahler, a financial and life planner in Rapid City, South Dakota, writes a wonderful blog called Financial Awakenings. When I read his most recent entry, it reminded me how important this back-to-basics approach is to financial security. Regardless of age, and regardless of level of wealth. Yes, you know this stuff…but it’s good to be reminded as you clarify your 2016 goals.
Here are Rick Kahler’s top 10 back-to-basics musts from his January 4 blog, Classic Money Advice:
Understanding and managing your thoughts, feelings, and beliefs about money is as important as understanding how money works. Our brains are hardwired to make poor financial decisions. Exploring your money history and learning to identify your unconscious beliefs about money can change your financial behaviors forever. It is crucial to gaining and keeping control of your finances and becoming comfortable using money as the valuable tool it is.
Building an emergency reserve to cover living expenses for six months to a year if you lose your job or experience a business slump isn’t just a good idea, it’s a necessity. If you are retired, having one to three years of cash available to cover living expenses can help you avoid taking money out of investments when their value has declined.
Retirement will happen, sooner than you think. Start early—as in the day after college graduation—and be consistent in investing at least 20 percent of your paycheck in your 401k, IRA or SIMPLE plan.
Learn to appreciate the word “budget.” Creating a plan to track and manage income and spending is an essential skill to survive and thrive financially. Numerous free or inexpensive tools, like Mint.com and Quicken, can help.
Run from consumer debt. If you can afford a credit card payment after you purchase something, you can afford to save first and buy with cash. Personally, I use credit cards for almost every purchase for both convenience and cash back or travel rewards. However, it’s imperative to pay the card off every month, without fail.
A house is a home, not an investment. Don’t buy more home than you can afford, and don’t buy without a down payment.
No asset goes up forever. Price declines, even crashes, are a normal part of investing. It’s essential to understand that the value of your portfolio will fluctuate. Be prepared to ride out downturns. Selling in a down market is “the big mistake” that will cost you dearly.
The fundamental strategy for managing market ups and downs is asset class diversification. This doesn’t mean having money in different banks, with different brokers, or in different mutual funds. It’s about having a good balance of mutual funds that invest in US and International stocks, US and International bonds, real estate investment trusts, commodities, market neutral funds, Treasury Inflation-Protected Securities, and junk bonds.
There are no free investments. Pay attention to the fees and taxes associated with any investment, as well as how the advisor recommending any investment is compensated.
Pay yourself first. The most successful savers and investors I know simply take all their fixed expenses, taxes, and retirement contributions off the top of every dollar earned, then spend the rest. That means learning to live on 30% to 50% of every dollar you earn. This may sound unreasonable or even impossible for anyone who is just starting out, raising a family, or getting by from month to month. Certainly, it isn’t easy. But one of the most valuable financial habits to create, beginning with your very first paycheck, is to save something for the future instead of spending everything that comes in.
These are all great, but “pay yourself first” is one piece of advice that changed my own life. When I was a twenty-something divorcee and mother of two young children, I read Sylvia Porter’s Money Book. At that time in my life, it was true that “even a pack of lifesavers was a financial decision.” From Sylvia Porter, I learned that spending is what I paid everyone else, and saving is what I paid myself. I took action, and I started setting aside just $5 per pay period (this was just before the advent of the 401k in 1978). The result: every few months I’d get a crisp new US savings bond. It was my first step to a more secure financial life and future.
So here’s my challenge to you for the New Year: Ask yourself what specific step you will take in 2016 to help build your own financial security. It may be from Rick’s list, or it may be something else entirely. Whatever it is, set it, plan it, and stick to it. I’d love to hear how it impacted your life when we hit week 52 next December.
Need assistance identifying your next step and putting it into action? Let’s schedule a time to chat. As always, I’m here to help.