3 FINANCIAL RESOLUTIONS FOR 2019
It’s that time of the year again! As you and your partner reflect back on this past year, you may ask yourselves, “Are we in a better financial position this year then we were last year?” As you answer this question, you may begin thinking about financial goals you want to set in the year ahead. Here are three resolutions that can help increase your financial fitness today and in the New Year.
Guest Contributor Matthew Bungo, CFP®
Resolution 1: Create a budget for life
When it comes to finances, life can be viewed as cash flowing in—and out. Saving and investing during your working years, if you stick with it, could lead to a rising net worth over time, enabling you to potentially achieve many of life’s most important goals. Creating your own budget and net worth statement can help you build your road map and stay on track.
· Create a budget and pay yourself first. If you’re not sure where your money is going, track your spending using a spreadsheet or an online budgeting tool for 30 days. Determine how much money you need to cover your fixed monthly expenses, such as your mortgage and other living expenses, and how much you’d like to put away for other goals. For retirement, our rule of thumb is to save 10–15% of pre-tax income, including any match from an employer, starting in your 20s, then add 10% for every decade you delay saving for retirement. Once you commit to an amount, consider ways you can save automatically. Research shows that if you “pay yourself first,” it makes savings easier.
· Calculate your personal net worth annually. It doesn’t have to be complicated. Make a list of your assets (what you own) and subtract your liabilities (what you owe). Subtract the liabilities from the assets to determine your net worth. Don’t panic if your net worth declines during tough market periods. What’s important is to see a general upward trend over your earning years. If you’re retired, you’ll want to plan a drawdown strategy to make your net worth last as long as necessary, and to support other objectives
· Project the cost of essential big-ticket items. If you have a big expense in the near term, like college tuition or roof repair, increase your savings and treat that money as spent. If you know that you’ll need the money within a few years, keep it in relatively liquid, relatively safe investments like cash equivalents.
· Retired? Invest your living-expense money conservatively. Consider keeping 12 months of living expenses after accounting for non-portfolio income sources (Social Security or a pension) in short-term CDs, an interest-bearing savings account, or a money market fund. Then keep another one to four years’ worth of spending laddered in short-term bonds as part of your portfolio’s fixed income allocation. This can help provide the money you need in the short term, allowing you to potentially invest other money for a level of growth potential that makes sense for you, which could reduce the chances you’ll need to sell more-volatile investments (like stocks) in a down market.
· Prepare for emergencies. If you aren’t retired, we suggest creating an emergency fund with three to six months’ worth of essential living expenses, set aside in a savings account or money market fund. The emergency fund can help you cover unexpected-but-necessary expenses without having to sell more volatile investments.
Resolution 2: Manage your debt
Debt is neither inherently good nor bad—it’s simply a tool, if used smartly. For most people, some level of debt is a practical necessity, especially to purchase an expensive long-term asset to pay back over time, such as a home. However, problems arise when debt becomes the master, not the other way around. Here’s how to stay in charge.
Keep your total debt load manageable. Don’t confuse what you can borrow with what you should borrow. Keep the monthly costs of owning a home (principal, interest, taxes and insurance) below 28% of your pre-tax income and your total monthly debt payments (including credit cards, auto loans and mortgage payments) below 36% of your pre-tax income.
Eliminate high-cost, non-deductible consumer debt. Try to pay off credit card debt and avoid borrowing to buy depreciating assets, such as cars. The cost of consumer debt, if you carry a balance, adds up quickly.
Resolution 3: Optimize your portfolio
We all share the goal of getting better investment results. So create a plan that will help you stay disciplined in all kinds of markets. Follow your plan and adjust it as needed. Here are ideas to help you stay focused on your goals.
Focus first and foremost on your overall investment mix. After committing to a savings plan, how you invest is your next most important decision. Have a targeted asset allocation—that is, the overall mix of stocks, bonds and cash in your portfolio—that you’re comfortable with, even in a down market. Make sure it’s still in sync with your long-term goals, risk tolerance and time frame. The longer your time horizon, the more time you’ll have to potentially benefit from up or down markets.
Diversify across and within asset classes. Diversification* can help reduce risks and can be a critical factor in helping you reach your goals. Mutual funds and exchange-traded funds (ETFs) are great ways to own a diversified basket of securities in just about any asset class.
Consider taxes. Place relatively tax-efficient investments, like ETFs and municipal bonds, in taxable accounts and relatively tax-inefficient investments, like actively managed mutual funds in tax-advantaged accounts.
Monitor and rebalance your portfolio as needed. Evaluate your portfolio’s performance at least twice a year using the right benchmarks. Remember, the long-term progress that you make toward your goals can be more important than short-term portfolio performance. As you approach a savings goal, such as the beginning of a child’s education or retirement, begin to reduce investment risk, if appropriate, so you don’t have to sell more volatile investments, such as stocks, when you need them.
Whether your resolution is to improve your personal fitness or to improve your financial fitness, we all need to create a plan and stick with it if we want to accomplish our goals. It’s important to have a disciplined approach and have an accountability partner to help you stay on track. Create your goals as a couple or share your goals with your partner to help keep you accountable. Check in regularly to make sure you are still on track. If not, assess what you need to do differently, and keep moving in the right direction to reach your goals.
Presented by Matthew Bungo, CFP®