6 Steps to Achieve Your Financial New Year’s Resolutions
Did you make New Year’s resolutions this year? Considering that the most common topics are health and finances, there’s a pretty good chance that at least one of them involves a financial goal.
Unfortunately, there’s also a pretty good chance that any resolution we make won’t be kept. Here are some ways to make sure that you at least keep your financial ones:
1) Set SMART goals
When we set a vague goal like “save more money” or a seemingly insurmountable one like “pay off all debt,” we’ve already set ourselves down the path to failure. Instead, you want your goal to be SMART: specific, measurable, attainable, realistic, and time-sensitive. Instead of “save more money,” a SMART goal might be to save an extra $5,000 for emergencies by the end of the year.
2) Determine how you’ll invest for each goal
For goals to be funded within the next 5 years, you’ll want to keep your money somewhere safe like a bank account or stable value fund that just earns interest and doesn’t fluctuate in value. That’s because if you invest the money in something more aggressive like stocks, it could lose value and not recover by the time you need the money. The benefit of a higher return is also much less when the money has such a short time to compound.
For longer term goals, it probably makes sense to take some investment risk. Otherwise, you face the risk of having your purchasing power reduced by inflation. A 1% return with 2% inflation is actually losing 1% a year in real terms of what you can buy with that money.
Having just 20% in stocks can give you enough growth to at least keep pace with inflation. The exact percentage depends on your comfort with risk. Just keep in mind that your time frame is how long your money might be invested so retirement would be a long term goal even if you’re retiring in less than 5 years unless you’re planning to use the money to pay off your mortgage or purchase an immediate annuity.
The more you invest in stocks, the higher your expected return is in the long run. As a general estimate the following breakdown may be used as a general guide; a 6% return for aggressive investors, 5% for moderate, and 4% for conservative. All are below the average long term returns to be on the safe side.
3) Look for tax-advantaged ways to save
Talk to you accountant, we are here to provide you with the best solution for your circumstance. Also be proactive in understanding tax implications that effect your financial decisions.
4) Minimize your investment costs
Within each account, look for the lowest cost options to implement your investment allocation based on your time frame and risk tolerance. Studies have shown that when comparing similar mutual funds, low costs are a much better predictor of future performance than looking at past performance. In particular, index funds that simply track a given market typically have the lowest fees and trading costs so see if they’re available in your account.
5) Automate your saving
This is the most important step because you can have the perfect goals, the perfect plan, the perfect account, and the perfect investments but they won’t mean anything without actual savings. By automating your savings, you make sure that they take priority vs. saving whatever you have left at the end of the month. You can do this by payroll deduction or automatic transfer from your bank account.
6) Adjust as needed
Once a year, you’ll want to revisit your goals, re-run your calculations based on your actual investment returns, see if tax laws have changed, and re-balance your portfolio. If your investments are down in value, this is not a reason to change them but just a natural part of the cyclical nature of investing. Instead, try to see it as an opportunity to purchase more shares at a lower price through your automatic investing and re-balancing. The same is true if you have a mutual fund that’s under-performing other funds. Unfortunately, no fund consistently outperforms all the time but you’ll maximize your odds by keeping your costs as low as possible.
As you can see, you don’t have to spend hours researching or following the stock market, to achieve your financial goals. When you break it down into these relatively simple steps, you may find that it actually requires little time and sacrifice than you thought. Don’t you wish you could say the same about dieting and exercise?
Source: www.forbes.com