New Year, New You: Personal Finance Considerations For The New Year
When many are looking at New Year's resolutions, it's often a great time to consider adopting a quick personal finance checklist of areas to review for the new year. As we begin this new year, here is a Three-Step Process you can adopt to make sure you are intentional about managing your finances.
Step One: Evaluate Your Current Financial Health
Evaluating your current financial health is key in determining which financial goals you want to pursue. Many may start with setting financial goals. However, it can be difficult to fully capture which goals to include in your annual financial planning if you have not evaluated your current status. Here are a few areas to consider:
Review Your Net Worth
You may have seen on television or read about it on social media how a particular millionaire has built a net worth in the millions of dollars. Did you know, though, that everyone has a net worth number? Net worth is calculated by adding up all of an individual's assets and subtracting all of an individual's liabilities. Putting it another way, if you add up the value of everything you own (bank and retirement accounts, investments, real estate, etc.) and subtract out all debt (credit card balances, mortgages, car loans, etc.), you will arrive at your personal net worth.
Goal Setting Tips
If your net worth is negative, your financial goals should include actions centered around reducing your debt. Make one of your goals to review your credit report and determine which accounts you can begin to reduce realistically.
If your net worth is positive, you'll want to explore ways in which you can continue to increase it over time. Focus on building your savings plan in step three below.
Check Your Credit Report
It is always a good idea to review your credit report and determine any changes that have occurred over time. You can obtain one free credit report from each credit bureaus once per year via www.annualcreditreport.com. Due to the COVID-19 pandemic, all three credit bureaus offer one free credit report per week until April 20, 2022.
Goal Setting Tips
Review your credit report for errors and dispute any incorrect information.
If you're interested in learning more about how credit reports and scores work, check out the Federal Trade Commission's "Understanding Your Credit."
Build a plan to reduce overall debt.
Step Two: Set or Reset Your Financial Goals
Once you have determined your current financial status, now is time to define or refine your financial goals. When determining your financial goals, ensure that they are SMART (Specific, Measurable, Attainable, Relevant, and Time-Bound). If you need help building those goals, check out the Setting Goals worksheet offered by Consumer Financial Protection Bureau's Your Money, Your Goals Toolkit. As you consider which goals to include, remember that you don't have to tackle every financial goal at once. Consider those included below and select one to focus on. Once you have achieved one, then you add in the next.
Goal Setting Tips
Think about what you value and ensure that every financial goal supports that. If you value having a substantial retirement fund, your financial goals should reflect how you intend to get there. If you value spending time with family across the country, your financial goals should include a budget for travel expenses.
Make sure that the goals you consider are always realistic for your current situation. Do not anticipate saving $5,000 in two months if you only have $100/month to put aside for savings.
Step Three: Establish Saving and Spending Plans to Achieve Your Financial Goals
After evaluating your current situation and establishing your initial financial goals, it's time to develop or refine your action plan for achieving those financial goals. Your savings and spending plans should reflect you are establishing financial goals at all times.
Goal Setting Tips – Savings Plans
Determine your progress toward fully funding your emergency savings. Set a goal to have an emergency fund to cover at least three to six months of essential expenses.
Review your retirement savings and determine if adjustments are necessary. Contribution limits are increasing for employer-sponsored accounts in 2022. If you are already contributing the maximum amount allowed under your employer-sponsored retirement plan, you may boost your contributions. If you are not yet taking full advantage of this option, consider setting a goal to increase your contributions.
If you are eligible for a Roth IRA, consider setting a goal to begin or increase your annual contributions.
If you have large purchases in your future, such as home or auto purchases, review your savings progress for these goals. Determine if expenses could be decreased to support your financial goals further.
Goal Setting Tips – Expenses Plans
If you do not already have a method for tracking expenses in place, set a goal for building accountability here. Begin tracking your expenses for two weeks to determine where your funds are going. Review your progress and decide if any changes are necessary.
Try utilizing a budgeting app such as Mint or You Need a Budget (YNAB).
It's Only The Beginning
Remember as you work toward your new year financial goals not to overdo it. Choose one or two areas to focus on and move forward only after achieving progress on those. The joy is in the journey! Happy New Year!