Financial security is a marathon, not a sprint. It requires building life-long habits and focusing on financial healthy, the dividends of which are measured in years or decades, not a few weeks in January. But, many of us like to use the New Year as an opportunity to see where we are, and plan for the future.
Here are five financial resolutions for the new year. They’re far from all you’d need to construct a viable financial plan, and they’re not investment advice, but they are sound principles that most people should probably think about.
1. Make a Plan
Everyone’s situation is different. Some people work 9-5, some ride the gig-economy train . Some have families. Others are planning for retirement that’s decades away, and for others it’s closer. The details vary depending on what phase/season of life you are in but what isn’t negotiable is that everyone should have a financial plan — whether you’re anticipating retirement, planning to close on your first house, saving for kids’ college, or somewhere in between.
What should a financial plan include?
A realistic, workable budget that tracks income and expenses and save for the future. There are countless options to start a budget and track expenses and savings. There are mobile and desktop apps, Excel spreadsheets, others go old-school with paper and pencil. Many people talk to financial advisors, others read trustworthy books, and some go it alone. Whatever works for you is fine, but you need a budget. How should you allocate the budget?
Create specific, measurable goals.
What do houses, college tuition, retirement, and boats have in common? Most people need to save for them. The problem: abstract goals like ‘save more money this year’ usually fail, for two reasons. First, these goals are hard to measure and easy to rationalize. Second, there isn’t a clear reward at the end of the tunnel. Budgeting can be hard and delayed gratification is not incredibly satisfying (see: New Year’s dieting). It’s easier to motivate ourselves to do something hard if there’s a specific reward attached to it.
Another way to track spending and stay within-budget is automation: pay recurring bills and divert a portion of your income into retirement vehicles or investments automatically monthly.
An emergency fund. As the past couple years have demonstrated, we can never truly predict what’s going to happen next. Financially speaking, the best way to protect yourself is setting aside about three months worth of living expenses. Of course, the hope is that you never need that emergency fund — but if you do need it, you’ll be glad you have it.
2. Stick to the Plan . . .
. . . by making a realistic plan in the first place.
Not-so fun fact: less than half of the people who made New Year’s resolutions in 2021 kept them all. Goals are usually too broad, vague, or unattainable. Psychologists suggest breaking a large goal down into smaller constituent parts, and committing yourself to working on them individually.
This allows you to track your progress, make adjustments for unforeseen circumstances, and celebrate your accomplishments along the way.
It’s a little meta, but maybe the most important New Year’s resolution is…making better resolutions.
3. Plug Leaks
Think about online bank accounts, subscriptions, automatic payments, streaming services, etc. Digital financial services are powerful tools, but the New Year is also a good time to consolidate your digital financial identity, cancel redundant or disused subscriptions, and make sure you know where your money is and where it’s going.
4. Leverage the Free Money
While a well-planned portfolio should be diverse, and prioritize exposure to a variety of asset classes, it’s also pretty universally understood that you shouldn’t say no to free money. If your employer offers 401k matching, take it. Maxing out your 401k matching, and/or using tax-advantaged accounts to protect retirement savings, is a no-brainer because doing so can earn you significant returns with virtually zero risk.
5. Own Your Primary Residence
We’ve covered this one before. Homes are expensive — but so is rent. On average, mortgages are costlier than rents by about 16%. But in some U.S. cities, buying is actually cheaper. Even where buying is more expensive, owning your primary residence is one of the easiest ways to get some points on the “assets” side of the net worth equation and put your money somewhere it’ll appreciate over time. This can earn you money in the long run: as both property values and rents increase over time, it’s better to be a seller than a buyer.
