Q. I’ve made New Year’s resolutions in the past mainly focusing on being a nicer person and losing weight. Believe it or not, I’ve been successful with the weight loss goals but not so much on the one about being a nicer person. I’ll still add being a nicer person to my list for 2016 but now that my weight is under control I’d like to get my financial life in order. You probably can’t help me become a nicer person but what are some resolutions I should make that will help me get in financial shape?
A. According to a University of Scranton, Journal of Clinical Psychology 2015 study, your New Year resolutions are the top three. Self improvement is number one, weight related is number two and money related is number three (relationship related is number four). The study also states that only 8 percent are successful in achieving their resolution so, congratulations on attaining your resolution concerning weight. If I had to guess, you probably made a detailed plan about how many pounds and/or inches you wanted to lose within certain time frames. As with most goals, the more detailed the written plan the higher the probability of achieving the goal. The goals of being a nicer person and getting your financial house in order are very admirable and if you make and commit to a detailed plan I’m sure you can be successful with these resolutions.
You are correct that I’m not an expert on becoming a nicer person :) but I bet if you were more specific you’d accomplish this resolution too. Select a personality trait you are not proud of (gossip, unfriendly to strangers, rude to service personnel) and make a specific measurable statement about how you could improve in this area. Some examples that may be helpful follow: open a door for a stranger at least two times a week; give up your seat on the bus or subway at least every third time you ride; compliment a server/cashier at least every third time you frequent a restaurant or store; determine not to discuss anything negative about a person unless they are in your presence. Now, on to discussing financial goals, something about which I know!
The action items listed below are some of my top recommendations for financial resolutions.
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1) Establish an emergency fund. Three to 6 months of expenses should be set aside in a liquid account such as a savings or money market account. This will help prevent going into debt when unexpected expenses arise, such as home or car repair.
2) Spend less than you make. This doesn’t sound like a brilliant idea but doing this will greatly improve your financial situation. Few people develop a budget and only a small percentage of those that do are able to remain on a budget. Instead of budgeting; limit spending to 80 percent or less of your income and the rest will take care of itself. Know what your fixed expenses are and plan to save for big ticket items such as vacations and cars.
3) Reduce credit card and other consumer debt. List all of the amounts owed and minimum payments for each of your consumer credit accounts. Rank these by interest rate charged. If possible, transfer any high interest rate debt to an account with a lower rate. Many credit cards will offer teaser rates to encourage balance transfers. This may be advantageous but read the fine print before making additional charges. Additional charges will usually trigger an increase in the interest rate, defeating the purposes of the transfer. Monitor your credit report for free once a year through “annualcreditreport.com.”
4) Review your employer retirement plan investments and make sure you contribute at least enough to maximize any employer match.
5) If you meet the income limitations, invest in a Roth IRA using a highly rated no-load mutual fund. You have until April 15, 2016 to make a 2015 contribution. The maximum contribution for 2015 is $5,500 with an additional $1,000 allowed for those age 50 and above.
6) Make or review a current will, living will, power of attorney and health care power of attorney.
7) Review your insurance policies and need for additional coverage or a change in coverage.
8) Review your beneficiary designations for retirement accounts, life insurance and consider putting transfer on death or payable on death designations on non-retirement accounts.
9) Complete a net worth statement (see my website for sample template) and monitor your progress at least once a year.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624