Smart Financial Habits to Adopt in the New Year


December 22, 2023

Smart Financial Habits to Adopt in the New Year

December 22, 2023

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As the New Year unfolds, it brings with it a renewed sense of opportunity and the chance for a fresh start—often packaged up into a set of New Year’s resolutions. This is especially true when it comes to our financial well-being. Adopting smart financial habits is not just about saving money; it’s about cultivating a lifestyle that fosters long-term security, peace of mind, and the ability to enjoy life’s pleasures without the burden of financial stress.

In this blog post, we’ll explore practical and smart financial habits that can transform the way you manage your finances. From creating a realistic budget to understanding the nuances of investments, we’ll guide you through essential steps to help you work toward your financial goals in the New Year.

Setting Financial Goals for the New Year

The start of a new year is synonymous with setting goals, and when it comes to financial health, this step is imperative. Establishing clear, realistic, and measurable financial goals is the cornerstone of sound financial planning. It’s like setting a GPS for your financial journey; without a destination in mind, how do you know which turns to take?

Why Realistic and Measurable Goals Matter

Setting achievable and quantifiable financial goals is important because it gives you a clear target to aim for. These goals should be realistic, meaning they should be attainable within your current financial framework. For instance, aiming to save a million dollars in a year might be unrealistic for most, but setting aside a certain percentage of your income monthly toward savings is achievable.

Measurable goals allow you to track your progress. This could be through numerical targets, like saving a specific amount each month, or through milestone achievements, such as paying off a certain percentage of debt by mid-year.

Common Financial Goals Examples

Here are examples of financial goals to give you some inspiration:

  1. Saving for a Vacation: A popular goal that combines the pleasure of anticipating a reward with the discipline of saving. Decide on your vacation budget, then calculate how much you need to save each month to reach this goal by your intended travel date.
  2. Paying Off Debt: This is a critical goal for your finances. Whether it’s credit card debt, student loans, or a mortgage, setting a goal to reduce or eliminate debt can significantly improve your financial health.
  3. Building an Emergency Fund: Aim to save enough to cover at least three to six months of living expenses. This fund acts as a financial buffer in case of unexpected events like job loss or medical emergencies.
  4. Saving for Retirement: It’s never too early or too late to start. Determine a percentage of your income to regularly contribute to your retirement fund.
  5. Investing in Yourself: This could mean setting aside funds for education, professional development, or starting a business. Investing in your growth often pays the best dividends.

Creating a Budget That Works

A budget is more than just a spreadsheet or an app; it’s a roadmap for your financial journey. It’s an essential tool in your financial planning arsenal, helping you to not only keep track of your income and expenses but also to make informed decisions about your money. A well-crafted budget can be the difference between helping you achieve financial stability and uncertainty.

The Importance of Budgeting

Budgeting is crucial because it gives you control over your finances. It helps you prioritize your spending, track where your money is going, and identify areas where you can cut back. Most importantly, a budget can help you save for future goals and prepare for unexpected expenses, reducing financial stress.

Steps to Create an Effective Budget

  1. Gather Financial Information: Start by collecting all your financial statements, including bank statements, recent bills, and any other records of income and expenses.
  2. List Income Sources: Note down all sources of monthly income, ensuring to include only the net income (after taxes).
  3. Track Your Expenses: Categorize your monthly expenses into fixed (like rent or mortgage) and variable (like groceries or entertainment) costs. Identify areas where you can cut back, like subscription services you no longer use or dining out less frequently.
  4. Set Spending Limits: Based on your income and expenses, allocate specific amounts for each spending category. Be realistic in setting these limits.
  5. Plan for Savings and Debt Repayment: Allocate portions of your income to savings and debt repayment. Even small amounts can make a big difference over time.
  6. Review and Adjust: Your budget is a living document. Regularly review it and adjust as needed to reflect changes in your income, expenses, or financial goals.

Building an Emergency Fund

In the realm of personal finance, an emergency fund can help provide peace of mind. It’s a financial safety net designed to cover unexpected expenses, such as medical emergencies, car repairs, or sudden job loss. Having an emergency fund is a fundamental aspect of financial security, as it can prevent you from falling into debt when unplanned expenses arise. Without it, you may be forced to use credit cards, take out loans, or dip into retirement savings, which can derail your long-term financial plans.

Guidelines on How Much to Save and How to Start

Building an emergency fund might seem like a daunting task, but it’s a critical step towards financial resilience. Start small, be consistent, and gradually build a fund that can stand between you and life’s financial surprises.

  • How Much to Save: A common guideline is to save enough to cover three to six months’ worth of living expenses. However, the exact amount can vary based on your personal circumstances, like job stability or health considerations. If you’re self-employed or work in a volatile industry, you might want to aim for a larger fund.
  • Assessing Your Monthly Expenses: To determine the size of your emergency fund, calculate your essential monthly expenses, including rent or mortgage, utilities, food, insurance, and any other necessities.
  • Starting Small: If saving several months’ worth of expenses seems daunting, start small. Even a fund of $500 or $1,000 can cover many minor emergencies.
  • Setting Up a Separate Account: Open a separate savings account for your emergency fund to avoid the temptation to spend it. Look for accounts with high interest rates to grow your fund faster.
  • Automatic Savings: Set up automatic transfers from your checking to your emergency fund right after payday. This “pay yourself first” approach ensures consistent savings.
  • Adjusting as Your Financial Situation Changes: As your income grows or your expenses change, adjust the amount you contribute to your emergency fund accordingly.
  • Resist the Urge to Dip into the Fund: Only use your emergency fund for genuine emergencies. This isn’t for vacations or shopping sprees but for unforeseen, necessary expenses.

Understanding and Managing Debt

Debt is a reality for many, but it doesn’t have to be a life sentence. Understanding and managing debt is a crucial aspect of financial wellness, especially in the New Year when we set goals to improve our financial situations. It’s important to recognize the different types of debt and their impacts on your financial health, as well as to employ effective strategies to manage and pay down this debt.

Types of Debt and Their Impact on Financial Health

  • Good Debt vs. Bad Debt: Not all debt is detrimental. Good debt, like a mortgage or student loans, represents an investment in your future and typically comes with lower interest rates. Bad debt, such as high-interest credit card debt, can be costly and hinder your financial growth.
  • Secured vs. Unsecured Debt: Secured debts are tied to an asset, like a car or home, while unsecured debts, like most credit cards and personal loans, are not. Understanding the nature of your debt is crucial in prioritizing repayments.
  • Short-Term vs. Long-Term Debt: Short-term debts typically need to be paid off quickly, whereas long-term debts, like mortgages, have a longer life span. Balancing these debts requires an understanding of their terms and impacts on your finances.

Strategies for Paying Down Debt

Understanding your debts and implementing a clear strategy for paying them off is a powerful step toward reaching your financial goals. The new year is an ideal time to start taking control of your debt and pave the way for a healthier financial future. Here are some strategies to consider:

  • Create a Debt Repayment Plan: List all your debts, including amounts owed and interest rates. Prioritize them by interest rate or balance size, depending on what strategy (avalanche or snowball) best fits your situation.
  • Consolidate and Refinance High-Interest Debts: Consider consolidating multiple high-interest debts into a single loan with a lower interest rate, or refinance existing loans to more favorable terms.
  • Budget for Debt Repayment: Adjust your budget to allocate more funds towards debt repayment. Even small increases in monthly payments can significantly shorten the debt repayment period.
  • Cut Unnecessary Expenses: Free up more money for debt repayment by reducing non-essential expenses.
  • Build an Emergency Fund: While paying down debt, also work on building a small emergency fund to avoid accumulating new debt in case of unexpected expenses.
  • Seek Professional Advice: If debt feels overwhelming, consult a financial advisor or consider credit counseling services for personalized guidance.
  • Stay Informed and Patient: Stay updated on changes in interest rates and terms of your debts. Remember, paying off debt is a journey that requires patience and perseverance.

Investing for the Future

As we step into the new year, one of the smartest financial habits you can adopt is investing for the future. Investing is not just for the wealthy; it’s a crucial tool for anyone looking to grow their wealth over time. Understanding the basics of investing and familiarizing yourself with beginner-friendly investment options can set you on the path to financial independence.

The Basics of Investing and Types of Investments for Beginners

Investing involves putting your money into ventures like stocks, bonds, or real estate, with the expectation that your capital will grow over time. The power of investing lies in the potential for your investments to compound, meaning you earn returns on your returns, as well as on your original investment.

Investing might seem intimidating at first, but starting small and choosing the right investment types can make it manageable for beginners. Here are some investment options to consider:

  • Stocks: Buying stocks means purchasing a small part of a company. While stocks can be volatile, they offer potential for significant growth over the long term.
  • Bonds: Bonds are essentially loans you give to a company or government in return for regular interest payments. They are generally considered safer than stocks but offer lower returns.
  • Mutual Funds: These funds pool money from many investors to buy a diversified portfolio of stocks, bonds, or other securities. They offer diversification and are managed by professionals.
  • Exchange-Traded Funds (ETFs): Similar to mutual funds, ETFs also offer diversified investments, but they trade like a stock on an exchange. They often have lower fees than mutual funds.
  • High-Interest Savings Accounts and CDs: For those who prefer minimal risk, these savings products offer a safe way to grow your money, albeit with lower returns.

Maxing Out Your Retirement Accounts

As we embark on a new year, one of the most impactful financial habits you can adopt is maximizing contributions to your retirement accounts. Whether it’s a 401(k), an IRA, or another type of retirement savings plan, contributing the maximum allowable amount can significantly enhance your long-term financial security and take full advantage of tax benefits. Let’s delve into why this is important and how to approach it.

The Importance of Maximizing Retirement Contributions

  • Compound Growth: The more you contribute, the more capital you have growing. Over time, the power of compound interest can turn these contributions into substantial retirement savings.
  • Tax Advantages: Contributions to traditional retirement accounts are often tax-deductible, reducing your taxable income. For Roth accounts, you contribute after-tax dollars, but withdrawals in retirement are tax-free.
  • Employer Match in 401(k)s: If your employer offers a matching contribution in your 401(k), maximizing your contribution helps you take full advantage of this free money.
  • Long-Term Security: Maximizing your contributions can help ensure that you have enough funds to maintain your lifestyle in retirement and cover expenses like healthcare.

How to Max Out Your Retirement Accounts

  1. Understand Contribution Limits: Be aware of the annual contribution limits for different retirement accounts. For example, 401(k) and IRA limits can change yearly.
  2. Budget for Retirement: Include retirement contributions in your budget. Treat them as non-negotiable expenses, similar to rent or mortgage payments.
  3. Increase Contributions Gradually: If maxing out seems daunting, consider gradually increasing your contribution percentage each year or whenever you get a raise.
  4. Automate Contributions: Set up automatic transfers to your retirement accounts to ensure consistent contributions without having to think about it each month.
  5. Balance with Other Financial Goals: While it’s important to maximize retirement contributions, also consider other financial goals, like paying off high-interest debt or building an emergency fund.

Strategies for Those Nearing Contribution Limits

  • Catch-Up Contributions: If you’re 50 or older, take advantage of catch-up contributions, which allow you to contribute additional funds above the standard limit.
  • Diversify Retirement Accounts: If you hit the limit on one account, consider contributing to another type of retirement account if you’re eligible.
  • Non-Retirement Investment Accounts: Once retirement accounts are maxed out, consider investing in a taxable brokerage account for additional savings.

Improving Credit Score

A new year is the perfect time to focus on improving your credit score. Understanding how credit scores work and why they are essential is the first step toward better financial health. A good credit score can open doors to better interest rates, more favorable loan terms, and can even impact non-credit aspects like renting an apartment or insurance premiums.

Understanding Credit Scores

Credit scores are numerical representations of your creditworthiness, typically ranging from 300 to 850. These scores are calculated based on your credit history, including factors like your payment history, the amount of debt you have, the length of your credit history, the credit types you use, and recent credit inquiries.

Why Do Credit Scores Matter?

  • Loan Approval and Interest Rates: A higher credit score generally means easier loan approvals and lower interest rates.
  • Credit Card Offers: Good credit scores can qualify you for credit cards with better rewards and benefits.
  • Housing Opportunities: Many landlords check credit scores before leasing, and a good score can make the process smoother.

Practical Tips for Improving Your Credit Score

  1. Pay Bills on Time: Timely payment of your bills, including credit cards, loans, and even utility bills, is crucial. Payment history is the most significant factor in your credit score.
  2. Keep Credit Card Balances Low: High balances relative to your credit limit can hurt your score. Aim to keep your credit utilization ratio below 30%.
  3. Avoid Opening Too Many New Accounts at Once: Each new credit application can result in a hard inquiry, which can lower your score temporarily.
  4. Regularly Check Credit Reports: Review your credit reports for errors. Dispute any inaccuracies you find with the credit bureau.
  5. Keep Old Credit Accounts Open: The length of your credit history matters, so keeping older accounts open can help boost your score.
  6. Consider Diverse Types of Credit: Responsibly managing a mix of credit types, like credit cards, a car loan, or a mortgage, can positively impact your score.
  7. Set Up Payment Reminders or Auto-Pay: This ensures you never miss a payment, which is vital for maintaining a good credit score.

Automating Your Accounts

In the digital age, one smart financial habit you can adopt for the New Year is automating your accounts. Automation in finance is about setting up systems to handle your financial processes electronically and automatically. This method not only saves time but also significantly reduces the likelihood of errors and late payments, enhancing your overall financial management.

How to Automate Your Financial Accounts

  1. Set Up Automatic Bill Payments: Use your bank’s online banking platform to set up automatic payments for recurring bills like utilities, rent, or mortgage.
  2. Automate Savings Transfers: Arrange for a portion of your paycheck to be automatically transferred to your savings account. You can also use apps that automate savings in various ways, like rounding up purchases to the nearest dollar.
  3. Investment Contributions: If you’re investing, set up automatic contributions to your investment accounts, such as retirement funds or individual brokerage accounts.
  4. Monitor and Adjust: Regularly review your automated setups to ensure they still align with your financial goals and adjust them as necessary.

Conclusion

As we embrace a new year with enthusiasm and optimism, it’s the perfect time to adopt the smart financial habits we’ve explored. These habits are more than just good practices; they are stepping stones toward achieving your financial goals. Embarking on this journey might seem daunting, but remember, the most significant changes often start with small, consistent steps. You don’t have to do it alone, though. A financial professional can provide personalized guidance and support tailored to your unique financial situation. If you don’t currently work with a financial professional, we’re here to help. Contact the Liberty Group team today to see how we can help you work on creating smart financial habits that work for you.

Here’s to a prosperous and happy New Year!

 


Standard Disclosure

This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated.  The information contained within is believed to be from reliable sources.  However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors.  This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals. Past performance is no guarantee of future results, and any expected returns or hypothetical projections may not reflect actual future performance or outcomes. All investments involve risk and may lose money. Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must evaluate and investigate any investments considered or any investment strategies or recommendations described herein (including the risks and merits thereof), seek professional advice for their particular circumstances, and inform themselves about the tax or other consequences of any investments or services considered.  Investment advisory services are offered through Liberty Wealth Management, LLC (“LWM”), DBA Liberty Group, an SEC-registered investment adviser.  For additional information on LWM or its investment professionals, please visit www.adviserinfo.sec.gov  or contact us directly at 411 30th Street, 2nd Floor, Oakland, CA  94609, T: 510-658-1880, F: 510-658-1886,  www.libertygroupllc.com. Registration with the U.S. Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training.

References

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Fidelity. (April 4, 2023). How Much to Save for Emergencies. https://www.fidelity.com/viewpoints/personal-finance/save-for-an-emergency 

Haegele, Bob. (April 7, 2023). When You Should Use a Taxable Brokerage Account. SmartAsset. https://smartasset.com/investing/when-you-should-use-a-taxable-brokerage-account

NerdWallet. (June 30, 2023). 30% Credit Utilization Rule: Truth or Myth? https://www.nerdwallet.com/article/finance/30-percent-ideal-credit-utilization-ratio-rule