As one year turns into the next, you may pledge to improve your finances. But if you’re like more than 90% of the population1, your New Year’s resolution will be little more than a memory by the time winter ends.
There are several possible explanations for this high failure rate. Some people are overly ambitious and set themselves up for disappointment from the start while others struggle to stay motivated.
Fortunately, you can put yourself on the path to success this year by setting realistic and compelling financial goals.
Find your financial documents and collect them in one place. Depending on your situation, you may need to pull:
Bank, credit card, loan, or investment account statements
Insurance policies
Estate planning paperwork
Pro Tip: Working with digital copies is eco-friendly. However, having paper documents in front of you may make it easier to glance back and forth and see the bigger picture.
Review every document carefully and answer questions like:
How much debt do I have, and at what interest rate?
Do I have an adequate emergency fund (at least three months of living expenses)?
Do I have (and stick with) a budget?
Are there expenses I can cut or reduce to save money?
How much do I have saved for retirement?
How much have I invested outside of my retirement account?
How are all of my investments performing?
What insurance policies do I have, and how much coverage do they provide?
Do I have an estate plan established (will, living will, or power of attorney)?
Do I need to update my beneficiaries or who oversees my estate?
You should also consider any recent, upcoming, or desired life changes. Perhaps you’re getting married in eight months or want to buy a house within three years. Maybe you had a baby four months ago. Are your finances in good enough shape to support those events?
Based on the answers you come up with in step two, you likely have a few things you could do to improve your finances. For example, debt reduction could be an area of opportunity if you discover you owe more than $4,000 across three credit cards. You may also realize you need more life insurance now that you’re a parent.
At this stage, write down all of the financial concerns you identified. We’ll hone in on specific areas next.
Resolving to tackle your entire financial to-do list at once won’t get you very far. You’ll probably end up overwhelmed and frustrated. Plus, you’re less likely to make the progress you want in any money-related area if your attention is scattered.
Instead, rank the issues in order of importance and commit to tackling the top one or two items until they’re resolved to your satisfaction. Then, move on to the next area of opportunity.
For example, if you’re living paycheck to paycheck, you may prioritize reducing your expenses and building an emergency fund. On the other hand, if you’re financially secure, you may focus on wealth building and preservation activities such as increasing how much you invest or purchasing additional insurance.
It’s not enough to say you want to build an emergency fund, pay off debt, or invest more. Now’s the time to get specific and answer questions to define your goal.
How large of an emergency fund do I need?
How much do I want to invest this year and in what?
How much debt do I want to pay off this year and what type?
You need to put a number on your goal. Otherwise, you won’t be able to track your progress or determine when you achieve success.
Your goal should be attainable but challenging. If it isn’t feasible, you’ll likely give up quickly. If it’s too easy, you won’t grow from the experience or see significant financial changes.
Pro Tip: Tell someone close to you about your goals so they can support you and help hold you accountable.
With your goal in mind, it’s time to create a plan of attack. It can be helpful to break down what may seem like an enormous task into smaller, more manageable subtasks.
For example, let’s say you want to get your emergency fund balance up to $10,000, and you currently have $7,000 in the account. Assuming you don’t tap your existing cash, you must save $250 a month to hit your goal this year. You get paid biweekly.
Here are the action steps you could take:
Find ways to reduce your discretionary spending to free up money in your budget.
Set up a $125 automatic transfer into your savings account every two weeks.
Add more to the account manually when you receive a windfall to speed up the process.
Pro Tip: Automating money transfers and bill payments can make reaching your financial goals much easier.
You should regularly review your progress so you can change course, if necessary. For example, if your emergency fund hits $10,000 two months earlier than expected, you can allocate those funds to the next item on your list. On the other hand, if you had to withdraw $2,000 to cover an emergency home repair, you may need to increase what you save each pay period to hit your goal on schedule.
Pro Tip: If you’re struggling to stay on track, remember why you want to achieve your goal. Reflecting on this purpose can reignite your commitment.
As you reach milestones and accomplish your goals, take a moment to celebrate in a budget-friendly way. Doing so can help you stay motivated to continue the journey.
Goal setting isn’t a one-time activity. It’s a dynamic, continuous process that adapts to your circumstances. Goals can and do change, and the achievement of one typically leads to the need to create another.
Setting realistic financial goals can be challenging no matter when you try to do it. Your finances have a lot of moving, interrelated parts, making it difficult to know where to start. Chatting with a financial professional may bring some much-needed clarity if you're feeling lost.
1 https://www.verywellmind.com/why-new-years-resolutions-fail-6823972
This article is provided for general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
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