“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 2019 financials
Step one is knowing where your money is going. The only way to begin the budget process is to look back at your real-life spending habits. What are you spending and how are you spending it? To clearly answer these questions and to begin your 2020 Financial Fresh Start, you’ll want to:
Create broad categories, such as mortgage/rent, utilities, groceries, health care, family support, debt repayment, travel, entertainment, gifts, and miscellaneous spending.
Determine how much you spent in each category.
Pinpoint how much you were able to save when all was said and done.
Step 2: Restart in 2020
No matter where you stand with your 2019 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. Knowing what you are saving for helps you focus on sticking with your plan, and it ideally enables you to save more in the future. 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 2019 return. While there still may be some action steps to get done before the April 15th 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 2020 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 many changes to the tax law in 2017, 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, better manage your investment income, or utilize Qualified Charitable Distributions from your IRA). Remember these changes increased the standard deduction, eliminated the SALT (state and local tax) deduction, put a cap on mortgage interest deductions, and limited the deductions related to Home Equity Line of Credit (HELOC) interest, to name a few.
Step 4: Review your full financial plan
Once you clearly understand your 2019 finances, have created your 2020 goals, and established your tax strategy for the year, it is time to take step four: Meet with your CERTIFIED FINANCIAL PLANNERTM 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 its 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. These meetings tend to be relatively quick compared to an annual review. Set a meeting for mid-way through the year, spend 30 minutes or so preparing for the meeting, and 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 (“Modera”) is an SEC-registered investment advisor with places of business in Massachusetts, New York, New Jersey, Pennsylvania, North Carolina, Georgia and Florida. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. SEC registration does not imply any level of skill or training. For information pertaining to our registration status, fees and services, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov) to obtain a copy of our disclosure statement set forth in Form ADV Part 2A. Please read the disclosure statement carefully before you invest or send money.
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