5 Financial New Year’s Resolutions

Do you keep your New Year’s resolutions, or take them as folly?

The 6th Allianz Life New Year’s Resolution Survey was released last month. It is a national survey with about one thousand respondents. The respondents said their top areas of focus are fitness, finances and family – in other words, health and wellness, financial security and spending more time with loved ones. Interestingly, two other survey results were (1) only 15% said “financial planning” was part of their NY resolutions, and (2) respondents said they were generally more stressed going into this year than they were last year. Their top worries included data breaches/identity theft, terrorism threatening safety and security, stagnant paychecks, and market uncertainty.

If I were “more stressed,” then shouldn’t I pay more attention to my finances? Is this part of the part of the paradox of rational thinking versus human behavior which is often irrational? Or is it that people don’t put much seriousness into resolutions? I think it’s a little of both, and emphasizes the importance of the financial planning industry.

Inertia is tough to break – if my life’s going “pretty good,” then why mess with things? Perhaps those surveyed had more confidence in their financial affairs and thus discounted the need to revisit their planning – the US economy seems healthier, markets show strength (at least in the US), reports of lower unemployment, and maybe the pains of 2008-09 have been forgotten. However complacency can be dangerous, and ironic it is that we often need a little pain to push us into action – a financial crisis, health scare, etc.

So I offer five New Year’s resolutions to improve financial health.

Have a budget for life – Know where your money goes and make sure you’re well-funded for the future

  • Take a financial snapshot at least annually – Cash flow and net worth.
  • Create a budget (or spending plan) – Some people are more detailed in their budgeting than others, however, both stay within the lines (spend less than they make) and make saving a priority (pay themselves first).
  • Maintain sufficient reserves (money in the bank that’s not at risk). Targeted reserves are equal to 3-6 months’ living expenses (1 – 2 years if retired), plus planned big ticket expenditures (e.g. home repair, college costs, new car, etc.).

Manage your debt – Some abhor debt (“We haven’t paid interest in 32 years!”), and others use it as a tool (home mortgage, or cheaper than investment returns)

  • Understand the difference between what you can vs should borrow.
  • US student loan debt exceeds $1.2 trillion and 7 million borrowers are in default (The Economist, June 2014).
  • Consolidate debt where prudent to make it easier and quicker to pay off. Look for fixed rate terms (interest rates will rise) and avoid extending the payoff date.

Rebalance and optimize portfolios – Avoid making the “Big Investor Mistakes” (e.g. greed vs panic, under or over diversification, speculation, leverage, chasing performance, etc.).

  • Portfolio allocations should be in synch with your required returns, acceptable risk level, and time horizon.
  • Diversify investments and strategies.
  • Minimize expenses, including taxes.
  • Revisit the portfolio and make adjustments to stay on track.

Establish contingency plans – Life’s curly!

  • Review and update your estate plan and beneficiary designations.
  • Insure for those risks you can’t afford to pocket on your own – e.g. health, disability, life, property & casualty, liability, etc.). Review them with your insurance agent for adequate coverage and cost competitiveness.

Have balanced goals“The key to keeping your balance is knowing when you’ve lost it.” (Anonymous)

  • Vistage (an international association of CEOs) taught me this tool to be used as a scorecard.
  • Goals set for 6 categories (professional/financial, personal, well-being, spiritual, relationships, and wild card).
  • You are held accountable for your progress and outcomes.

Some may take New Year’s Resolutions as folly. However, planning for a lifetime of financial success is serious business. May your list of worries be shorter than your New Year’s resolutions. Happy New Year!

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