Financial New Years Resolutions
The end of the year is always a time of introspection. As the New Year approaches, we often look back at the past year and evaluate what went well and what we’d like to improve upon. The most common resolutions revolve around getting more organized, being healthier (losing weight or quitting smoking), or improving finances. In fact, around 34% of people make money related New Year’s resolutions. Let’s take a look at the top 4 financial resolutions that a financial advisor would like to see you make this year.
1) Spend Less and Save More
Most people will look at their finances and determine that they should save more money. A goal like saving more money is too vague. A proper goal can be measured. In order to have a successful retirement, a baseline savings rate should be 10% of gross income. The ideal range is closer to 15% of income. What percentage of income are you saving? If you’re not at 10%, take a small step and try saving and extra 1% or 2% this year. You most likely won’t notice a material difference in your take home income. If you make $50,000, 1% of your income is $500. That would equate to saving an extra $9.61 per week.
2) Rebalance Your Portfolio
For example, you may have an investment portfolio or a 401(k) that is made up of 70% equities (stocks) and 30% bonds. Over the course of the year, the equities portion of your portfolio may outperform your bond portion. As a result, your portfolio may look like it’s 75% equities and 25% bonds. This type of allocation may be too risky and not fit in with your financial goals. Rebalancing will bring your portfolio back to the original 70/30 allocation. Consistently rebalancing your portfolio will ensure that your investments are in line with your financial risk tolerance. Most 401k providers have the ability to automatically rebalance, so make sure you set it up when you log in.
3) Actually Understand Your Insurance Policies
I get it, insurance is boring and it’s not always fun to think about, getting sick, dying or getting disabled. Life events can significantly impact your finances. The best time to review your policy is before something happens. Take some time this year to read your insurance policies (Life, Health, Disability and Car Insurance) or at least review them with the person that sold them to you. Chances are your situation has changed from when you last purchased the policies. Look for any gaps in coverage, understand what the insurance carrier will pay for and what you’ll be responsible for. Telling the insurance company you didn’t know that “XYZ” wasn’t covered won’t help you come claim time.
4) Reduce Tax Liability
Most people have a 401(k) at work and that will constitute a majority of people’s savings for retirement. What many fail to realize is that there is a significant tax bill waiting for them. Let’s say you have $1 million dollars saved by the time you retire in your traditional 401(k) plan. One million dollars looks good, but if you are in the 25% tax bracket, you actually have $750,000 to spend in retirement. That is a big difference. After consulting with a financial advisor regarding your specific situation, you could, for example, consider splitting up your 401(k) contributions between a traditional 401(k) and the Roth 401(k). Many plans now offer a Roth 401(k) option. Roth 401(k) plans use after tax dollars and as a result, the investments will not be taxed when you take them out in retirement. $1 million dollars in your Roth 401(k)account means you’ll have $1 million to spend in retirement.
This material is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.