Whether you hate setting New Year's resolutions or it’s part of your yearly routine, the new year is a fantastic time to reassess your finances.
If you fall into the category of people hoping to save more and pay off debt next year, you are certainly not alone. A year-end study showed nearly half of all Americans are focused on saving more in the new year, while just over 30% are looking to reduce their debt.
But before you make any goals regarding your finances, there are a few factors to keep in mind.
Set a Realistic Timeframe
The most effective way to set realistic and achievable New Year’s financial goals is to make them SMART — Specific, Measurable, Achievable, Relevant and Time-bound.
Be as specific as possible when setting your goals. Don't just say “I am going to pay off my credit card debt” because there is no established timeframe. Instead, choose a date and plan to pay it off by then. Or better yet, establish target dates where you have a certain amount paid off at a time.
Also, make sure they are your goals and not based on a generic general rule of thumb that you read or saw online. Take some time and decide what matters most to you. Maybe it’s saving for a family vacation or figuring out when you and your spouse can retire. The most important thing is that they are unique to you.
Lastly, make sure you track your progress and celebrate your successes along the way. Find someone who can be your accountability partner so you have someone to celebrate with you.
Prepare for Market Conditions
Inflation has been one of the biggest financial headlines of the last few years. It impacts every aspect of your financial journey and is one of the factors that make long-term financial planning on a spreadsheet almost impossible.
The level of inflation changes not just the cost of goods and services but loan rates and interest rates on deposits. Home loans, car loans and personal loans have become much more expensive in the last few years.
The best way to prepare for inflation is to review your personalized plan and shock test the results against changes in inflation. This is where working with a financial advisor can make a huge impact. They can walk you through all of the different scenarios to ensure your portfolio can weather the storm.
Take a look at the contributions you are making to investments and see what adjustments need to be made. This is the best way to combat the long-term effects of inflation because your investments have the potential to outpace inflation over time.
Build an Emergency Fund
Rising costs continue to be a problem for Americans, and that’s why having an emergency fund ready for any financial crisis is so important.
A recent report shows that 1 in 4 Americans don’t have an emergency fund. A Bankrate survey broke it down by age group, showing Americans vary widely in their emergency savings levels:
- Gen Zers (ages 18-27): 29%
- Millennials (ages 28-43): 34%
- Gen Xers (ages 44-59): 31%
- Baby boomers (ages 60-78): 16%
Not having funds set aside for emergencies can leave you vulnerable to the unexpected. Whether it’s a dying car, furnace or unexpected travel expense — you need to be ready for whatever life throws at you.
Living within your means is also important and can be accomplished with a budget. Putting some money away via automatic transfers is key. Consider these automatic withdrawals as a bill, part of your overall budget — that way you won’t be tempted to spend the money meant for emergencies. When you get a raise or bonus, make sure you are increasing those automatic withdrawals!
Take Advantage of Your Retirement Options
Make the most of your retirement accounts or other tax-advantaged savings tools and contribute, at minimum, the match from your employer.
You may also have retirement perks that your specific employer may offer such as ESOP, stock purchase and the most common — Health Savings Account (HSA) or Flexible Savings Account (FSA). It's also important to take advantage of automatic contribution increases and auto rebalancing if offered by your employer.
Before you invest anything, it’s important to make sure that it aligns with your overall financial plan. At Zephyrus, we plan first and invest second, meaning we work with our clients to create a financial plan before we even talk about any investments.
And just like life, plans can change, which is why it is essential to work with a trusted financial advisor regularly. I recommend checking in at least every year to ensure that you’re setting yourself up for the best possible future.
The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Investment Services LLC cannot guarantee or represent that it is accurate or complete.