New Year’s Resolutions for Your Financial Health

Now is the time of year when we make New Year’s Resolutions.  Many of them revolve around personal health or fitness; give up desert, exercise more, lose weight, etc.  But this is also the time of year to think about your personal financial health.  Maybe your spending is a little bloated from the holidays, or perhaps you got out of the habit of saving regularly, just like I have gotten out of the habit of jogging regularly.  With all of the bad news coming out on the economy, and the stock market volatility, it is easy to “hide under the covers” and convince ourselves we’ll do better tomorrow.  But as with our physical fitness goals, we can achieve our fiscal fitness goals, as long as we follow a few simple rules:

• Make it achievable: It may not be realistic for a person making 70 thousand a year to save 40 thousand in 12 months for a down payment on their dream home.  Start with monthly or weekly deposits into a brokerage account.  Better yet, set up a payroll deduction ore automatic transfer, so you aren’t tempted to spend it before you have a chance to make a manual deposit.
• Make it measurable: Don’t just promise yourself that you will “save more the children’s education” for example.  Determine what they will need based on current tuition, inflation, and the number of years left until they start college.  Then determine what you can afford to save on a regular basis.  Again, automatic deposits or payroll deductions work great here. 
• Don’t take on too much at once: It may be difficult to pay off all your credit cards, save for college, increase contributions to your retirement, and purchase a home all at once.  Break them down into achievable tasks and prioritize them.  Work on them regularly.

 
Now that we have some rules, let’s talk about specific goals.  The following are suggestions to get you started.  The amount of time, effort and funding required for each one is up to you based on your ability and determination.

• Pay off revolving debt.  Making only minimum monthly payments increases overall interest expense and eats up future wealth.  If you have more than one, pay off higher interest cards first. 
• Establish a household budget and stick to it.  This is your financial diet.  Be careful of what you spend (to allow increase in allowable savings), and how you pay for it (to minimize interest expense and total cost of ownership).  Use a program like Quicken or Microsoft Money to track your spending.  Just like with a food diet, you can blow all your hard work during the week with one spending binge over the weekend.  The best diets give you an occasional chance to splurge, so when you reach an important savings milestone for example, allow yourself an indulgence, just keep it reasonable. 
• Set up 529 accounts for your children – the earlier the better.  Even relatively small monthly amounts add up.  At a reasonable 7.5% return, a $200 monthly contribution from age 2 until age 18 grows to $74,000
• Allow for a “Rainy Day Fund”.  I like to use 3-6 months of household expenses as a good target.  Total up rent, utilities, car payment, etc and multiply by a minimum of 3.  Again, if you aren’t already in the habit of saving, this will take some time, so set monthly target to put away and stick to it until you reach the target
• Increase your retirement savings; if your employer offers a 401K or similar plan with matching contributions, try to save at least up to the amount of the company match.  Consider the match an automatic return on your investment.  And the longer you have until retirement, the more it will compound.
• Give up watching the financial news on the TV all day.  Remember investing for the long term involves making regular contributions, putting your money to work in a diversified portfolio, and letting it grow over time.  The recent market volatility and habitually recalculating the impact on our savings is difficult for any of us to stomach.  And all the talking heads have different opinions on the next hot stock or sector, or when to get in or out of the market.  Instead of getting caught up in the frenzy, talk to your financial planner; monitor your portfolio regularly for changes in fund performance, and rebalance as necessary to maintain your target allocation. 

 
So start now.  Make a promise to get in better shape financially.  Don’t try to do all of these suggestions at once, but set reasonable goals, and work towards them every day.  If you have a slip up, get back to your routine as quickly as possible.  Just like your physical fitness, the road to healthy financial fitness requires consistent, long term healthy habits. 
 
John Davidson, CPA, is owner of KylesHill Financial Planning in Columbus, Ohio
 
 
Useful Links
https://www.collegeadvantage.com/ The Ohio 529 program.  Ohio Taxpayers can deduct up to $2000 of their contribution from their Ohio taxable income.
 
http://apps.collegeboard.com/fincalc/college_cost.jsp College Board’s tuition calculator will help you determine how much your kids will need and has good articles on how to get it (grants, loan programs, etc)
 

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