I heard an interesting quote recently, “May your troubles last as long as your New Year’s resolutions.” Let’s face it, most of us forget or abandon our January resolutions within days or weeks, if not sooner. Realistically, it is naive to think you can abruptly erase the habits of years past, inject more time into your days, or become a better version of yourself overnight.
Changing your lifestyle or improving your health – in this case, your financial health – takes significant time and effort. Instead of trying to overhaul your entire life all at one time, it might be prudent to take it one step at a time. Alone, improving and maintaining your financial health is not as difficult as you may think. Yes, it will take some dedicated time in the beginning, but once you are set up it becomes mostly a matter of “checking-in.”
Here are five steps to get you started on what we’ll call your “fresh start.”
Step 1: Review your 2018 financials
Step one is knowing where your money is going. When my fiancée and I became serious about getting married and buying a house, we sat down together to create a loose budget. The only way for us to even begin the budget process was to look back at our real-life spending habits. We knew we needed to determine what we were spending and how we were spending it. To clearly understand where our money was going, we:
Created broad categories, such as mortgage/rent, utilities, groceries, health care, family support, debt repayment, travel, entertainment, gifts, and miscellaneous spending.
Determined how much we spent in each category.
Pinpointed how much we were able to save when all was said and done.
You will want to go through this same process to begin your 2019 financial fresh start.
Step 2: Restart in 2019
No matter where you stand with your 2018 spending analysis, now is a great time to look forward and restart. Step two is all about creating (or revisiting) your financial goals and targeting your spending and savings objectives. In my marriage/home buying scenario, knowing what we were saving for helped us focus on sticking with our plan and enabled us to save more than we had in the past. To accomplish this step:
Use the categories you chose in step one to set a monthly target for each. The key word here is target, not budget. The goal is to help you be mindful of your spending.
Estimate how much you should be able to save if you stay within your spending targets.
Create realistic time-focused goals: Short term (0-2 years); intermediate (3-5 years); and long term (5+ years). Note: You should first be sure to have an emergency fund of three to six months of spending. This buffer will allow you more flexibility in spending and savings.
Step 3: Do your taxes now
Step three is to meet with your accountant or tax advisor to ensure you are maximizing your 2018 return. While there still may be some action steps to get done before the April 17 filing deadline (i.e., an IRA or HSA contribution), it is important to do this early because this is when you should begin to strategize your 2019 tax plan. Tax planning is not done only in December or April. You need to act now to ensure you are using the new tax plan to your full advantage. With the increase in standard deduction, loss of the SALT (state and local tax) deduction, and the cap on mortgage deductions, it is beneficial to ask your accountant or tax advisor what you can do now to maximize your tax savings (i.e., set up an LLC, increase charitable deductions in a high-earning year, or better manage your investment income).
Step 4: Review your full financial plan
Once you clearly understand your 2018 finances, have created your 2019 goals, and established your tax strategy for the year, it is time to take step four: Meet with your CERTIFIED FINANCIAL PLANNERSTM to update them on where you stand. Their role in your “fresh start” is twofold: 1) to put everything together into a thoughtful, comprehensive financial plan and 2) to help you implement the plan. In this step, you will review: 1) your investment allocation with an eye on the likelihood of success in meeting your financial goals, 2) your estate planning documents, and 3) your protection coverage, such as property and casualty insurance and life insurance. Remember, your plan is only as good as it’s execution, so be sure to review the analysis on these items and take any necessary action sooner rather than later.
Step 5: Check-in
If you are diligent and complete the first four steps, step 5 can be quite easy. This involves a 6-month check-in to follow up on your progress. Many of my clients like to do this with me, as their financial planner. These meetings tend to be relatively quick compared to an annual review. We set a meeting for mid-way through the year, my clients spend 30 minutes or so preparing for the meeting, and we review all current findings together. While minor plan tweaks might be required, usually the meeting is just a way to determine that you are still on track. It also helps you hold yourself accountable for the plan you established at the beginning of the year.
Step right up
The New Year is a great time for a financial fresh start. Following the beginning-of-the-year steps discussed in this article will help you face your financial future with clarity and confidence. Annually completing this process will get you in the best possible shape financially for the foreseeable future and put you in a position to best meet any financial challenges, changes, or speedbumps that do arise.
Modera Wealth Management., LLC is an SEC registered investment adviser with places of business in Massachusetts, New Jersey, Georgia, North Carolina and Florida. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.
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