Resolutions — or any type of goal — aren’t effective unless they have some basic characteristics. A key to any good resolution is that it’s realistic, measurable and specific.
Financial goals are easy to set, and can be surprisingly easy to achieve.
A popular and admirable financial resolution is to save and invest more. Let’s see how to make that goal realistic, measurable and specific. A generally achievable goal for regular saving is putting away 10% of your gross income. Gross income is your income before taxes and other deductions. If part of your goal is to save the additional money in an employer retirement plan, you can get a tax break if you use a traditional retirement choice — not a Roth contribution. For instance, if you’re going to save $1,000 in a company retirement plan and you’re in the 22% federal marginal tax bracket, it only lowers your out- of-pocket money by $780. But the entire $1,000 goes toward your savings goal. If your employer matches some of what you put in the company retirement account, that’s even more money for your future.
This is a resolution that can be achieved by setting your payroll deductions properly. From there, the additional savings are automatic, which makes them less of an effort.
Breaking any goal into smaller pieces can help make it achievable. For instance, if you want to build an emergency savings account of $10,000, breaking that into smaller amounts and setting up steps to save those amounts makes it less of an effort. If you get paid every two weeks, taking about $385 from each paycheck will result in $10,000 in emergency savings in a year. Having those amounts automatically deposited from your paycheck into your emergency savings account will take some of the effort out of this resolution.
Reducing debt is another popular resolution. Similar steps to the ones for savings are effective. Set a specific amount you’d like to lower your debt, break the annual reduction into monthly amounts, and make the payments automatic if possible. Next week’s article will explore more specifics about effective ways to reduce debt.
Many folks make a resolution to better understand personal finance. This one can be trickier than you might think. Be aware that free seminars may be presented primarily to generate new clients for the presenter.
That doesn’t mean the seminars are bad, but you need to look at the reasons for sessions. Many of these sessions are held at colleges, which doesn’t mean the education institution prepared the materials. Read popular finance books with a critical eye, too, especially if the author has no formal financial training. As with any resolution, be specific about what you want to learn and set ways to measure your progress.
Linda Leitz is a certified financial planner and can be reached at email@example.com.