The New Year often marks a natural point when you reflect on the last year and plan for the next year. While you are making your New Year's resolutions this year, consider your financial goals - both short-term and long-term.
Are you taking the steps necessary to have the joy-filled life you desire? Creating a list of financial resolutions can give you the financial fresh start you need to make progress towards those goals.
Step 1: Dream Boldly
Take some time to reflect on your overall financial picture. While everyone wishes they could be debt-free, financially stable, and prepared for retirement, tackling all of these items at once can be overwhelming. Take a moment to write down all of your goals.
Start broad and then get specific. Want to improve your credit score? Choose specific goals like paying off your credit card or paying your bills on time. Want to build up your emergency fund? List a specific amount of money you want to save. Want to buy a home? List the average home price in your area.
You can also include non-monetary goals such as reviewing portfolio allocation to reduce risk or learn more about a specific investing topic (be sure to check out our free investing course and blog if this is one of your goals). Don't worry about which goals come first or if your goals are realistic. Just get them all written down.
Step 2: Map Your Dream
Now identify the steps you need to take to reach each of these dreams. Use online calculators to figure out what your payment would need to be to pay off your debt. Visit our calculators page to determine how much you need to invest to get to your goal. Determine how much you need to save for a down payment for average home prices in your area.
Don't worry if you can't afford all of the items. We'll get realistic in the next step. For now, we are dreaming big and seeing what it takes to make our dreams a reality.
Step 3: Reality Check
This is the less fun but essential part: What can you afford? Determine how much money is available and adjust your plan to your reality.
Will the mortgage payment for the home you want to buy be less than 30% of your take-home paycheck? How much do you need to save for a down payment to make that happen? Perhaps you need to consider a more affordable condo. Or you will need to save for a few more years to make that 3-bedroom home a reality.
Maybe you won't be able to save or invest as much as you hoped, but some progress is better than nothing. You may need to completely delay progress toward some dreams until you take care of a few other items on your list. That's okay. Write down the changes to your plan on the same list by crossing out goals and writing the new amounts down. Your decisions will also be influenced by your next step: determining your priorities.
Step 4: Priorities
Now take a look at your plan and figure out which items are your top priorities. Choose your top three that you would want to stick to no matter what. You can decide if you want to throw all your energy and resources toward these goals, or if you want to make a little progress on all of your goals.
If you aren't sure which ones you should prioritize, consider the ones at the top of your list. You likely unconsciously put the things most important to you near the top.
The next thing to consider is opportunity cost. Will choosing one goal over another cause you to miss out on something valuable? Will you have this opportunity again?
Time is a huge advantage when it comes to investing. A longer timeline means you can handle more risk for higher potential rewards and benefit from more compounding growth. There are also annual contribution limits to many tax-advantaged accounts, so you have limited opportunities to contribute to your retirement account each year.
You will also want to consider cash flow and interest rates. Paying off low balances can increase cash flow, allowing you to contribute more to your other goals in the future. High interest rates can cause balances to balloon quickly, so you do not want to ignore these goals either.
Finally, pay attention to your emotions as you start to select your top priorities. If you experience strong emotions (fear, anxiety, joy, hope) as you rank your goals, it is telling you something. Goals are personal, and emotions can be the deciding factor in why one goal is chosen over another.
Step 5: Rewrite Your New Year's Financial Resolutions
This next step is optional. Rewriting a clean list can be a helpful way to reinforce your goals mentally. It also allows you to reflect on your decisions and evaluate how they make you feel. However, if seeing your original "dream big" goals and the goals you had to cross off is more motivating, keep the old list.
Step 6: Stick To Your Financial Resolutions
So now that you've nailed down your financial resolutions for the New Year, how do you make sure you stick with them longer than your resolution to go to the gym?
The best way to keep your financial resolutions is to make it easy. Automating your payments or contributions may help you by removing the decision-making step each month. Setting up an additional amount to be paid or having retirement contributions automatically deducted from your paycheck can help you stick to your plan.
If you aren't comfortable with automatically distributing money from your account, make the transactions part of a routine. Transfer money to savings when you pay your bills, or choose a specific date of the month to sit down and review your finances.
Telling a trusted friend or partner about your goal can be a way to create accountability. Ask your friend to check in periodically about your progress. If you aren't comfortable sharing these goals with a person, schedule an email to be sent to yourself asking if you are making progress on your goals.
Give yourself milestones to reach throughout the year to show that you are progressing toward your goal. Put a reminder in your calendar or have your electronic assistant of choice remind you of your goal in 3 or 6 months. For financial goals, choose numbers that are where you want to be by each deadline.
If you want to give yourself targets for non-monetary goals, create smaller, specific goals with a deadline.
Want to learn more about investing? Tell yourself you need to learn about investment accounts by 3 months, types of investments by 6 months, robo-advisors by 9 months, and retirement planning and drawdown strategies by 12 months. You'll make far more progress on your goal than if you just give yourself a general directive to learn about investing by next year.
When you achieve your short-term milestones, celebrate your success! Reward yourself for sticking with your financial resolution and making progress towards your goal. It can be as simple as stopping by your favorite coffee shop or going on your favorite hike.
These small celebrations not only acknowledge your hard work but also serve as positive reinforcement, motivating you to stay committed to your financial resolutions throughout the journey.
Financial Fresh Start
Bestie, this new year is an opportunity for you to dream big. It is a chance to take control of your finances and live life intentionally. It may take some time, but you are on your way with your list of New Year's financial resolutions. May they provide you with the financial fresh start you need to make your dreams a reality. You've got this! Happy New Year!
