Making Financial Resolutions for 2006

2006 is just around the corner! When it comes to your finances, the beginning of the year marks an excellent time to make changes. I have six suggestions for New Years Resolutions for your finances. For this post I enlisted the help of some of my blogger friends. I want to say thanks to Jim, FMF, Flexo, Smarty, Jose, Alexander, and Jonathan for helping me put this post together.

Personal Finance Resolutions

1. Set up an emergency fund. I learned about the importance of an emergency fund when my family and I had to evacuate for Hurricane Rita. We were fortunate enough to have some savings to use while we were out of our home for two weeks. A lot of people weren’t as fortunate.

Most “experts” say that you should have 3 to 6 months worth of living expenses in a readily-accessible place like a bank savings account, money market fund, or even short-term CD. If you don’t have an emergency fund, start one today.

Here’s what some of my blogger friends have to say about emergency funds:

2. Get out of debt (pay off those credit cards). Do you have credit card debt? If you do, you should be working as hard as you can to pay off credit card debt as soon as possible. Interest rates are on the rise. 2006 would be an excellent year to get out of debt. So, how do you do it?

The first thing you have to do is quit using your cards. Cut them up. The second step is to make a spending plan or budget (more on that later) so that you live within your means. The third step is to map out your payback strategy. You could use the strategy made popular by Dave Ramsey, which is to list all your credit cards in order of their balances from biggest to smallest along with their monthly minimum payment. Then, concentrate on paying off the smallest card while paying the minimums on all your other cards. Once the smallest card is paid off, take that payment and add it to the next smallest card. Continue this process until all your cards are paid off.

Paying off that smallest card first will do a lot for your self-esteem. For more posts on getting out of debt, check these out:

3. Manage Your 401(k). When was the last time you rebalanced your 401(k)? The beginning of the year is the perfect time to look at your 401(k) allocation and make adjustments. It is also important to keep up with the changes in your 401(k) plan. Companies change funds from time to time so it is a good thing to keep that in mind when you rebalance. You should look at your 401(k) at least yearly to see if you need to rebalance. Personally, I wouldn’t rebalance until a fund has moved 5% from your target. So, there may be years when you can leave it alone.

Also, make it a point to put in at least the maximum to get the company match (if you get a company match). Othewise, you are leaving money on the table.

For more on 401(k) plans, check out these posts from other bloggers:

4. Set up an IRA. After you have maxed out your 401(k) to get the company match, you should then think about opening an IRA. The younger you are and the lower the tax bracket you are in, the more advantageous is the Roth IRA. You put in after-tax dollars today but get tax free income when you retire (assuming you leave the money in the account 5 years and are at least 59 1/2 when you begin withdrawing earnings). For most people the Roth is a no-brainer.

I also like the flexibility of the Roth IRA. For instance, there are no required minimum distributions (RMDs) with a Roth IRA. So, if you retire and you don’t need the money, you can let your Roth IRA accumulate tax free. Also, Roth IRA distributions do not count against you when you have to compute the taxability of Social Security benefits.

For more on IRAs, check out these posts:

5. Set up a Budget. I know, I know, nobody likes the “b” word. However, a budget is a perfect way to see exactly where your money is going. This is especially important if you find yourself without money to start a 401(k) or IRA. Almost everyone can afford to put at least something back for the future. It may be that you have to prioritize where your money goes and possibly give up something. However, you will be thankful you took the necessary steps when you are retired.

When setting up a budget, try to keep it as simple as possible. The more intricate you make it, the more likely you are to give up on it. You don’t want a budgeting process that takes up a lot of time (unless it is your hobby). In fact, you might want to check out Richard Jenkins excellent article on the 60% Solution. Remember, the simpler the better.

For more on budgeting, check out these posts:

6. Prepare Personal Financial Statements. Businesses have to prepare financial statements, why shouldn’t you? The only reason I can think of as to why a person wouldn’t want to prepare personal financial statements is that they are afraid of what they might find out. If this is you, it is time to face reality.

Personal financial statements (I’m talking about a net worth statement and a cashflow statement, which is basically the same thing as a budget) are an excellent way to gauge your progress from year to year. If you go through the year knowing that you are going to be accounting for your habits the next time you prepare your financial statements, you will do a better job of keeping your spending under control. Also, once you prepare a net worth statement, you will find yourself wanting to improve your net worth. With every financial decision you make, you will think about how the transaction will affect your net worth.

I have posted a series on net worth statements. You can check them out here.

There are more financial resolutions you can make. The ones I have suggested will get you on the right track. Hopefully, next year at the time you will be in better financial shape.

I wish you the best in 2006!

NOTE: If you are a personal finance blogger and have posts that fit the categories above and would like your posts included, please send me an email (JLP – at – AllThingsFinancialBlog – dot – com) with the words “New Years Resolutions” in the subject line along with the post title and post URL. I’ll check it out and if I think it fits, I’ll be happy to include it.

For more on New Years Resolutions, check out Money & Investing.

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13 thoughts on “Making Financial Resolutions for 2006”

  1. Nice selection. About the only things I’d add would be to review your insurance coverage (particularly if you have whole life), build an emergency cash reserve, and set some goals for the intermediate to long terms for accumulating $$ (like college for the kids and retirement).

    Happy New Year to you all from the Unknown Household.

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  4. Good list of ideas. It seems to track the advice of Dave Ramsay in Financial Peace University pretty closely.

    I am skeptical, however, about rebalancing my investments every year. It seems to be pretty common advice, but to me it doesn’t make much sense.

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  7. Regarding “5. Set up a Budget,” you may wish to track your expenses after setting up your budget. Tracking your expenses has two benefits: 1) it lets you know whether you need to adjust your allocations next year, and 2) it helps the budget become realized in your lifestyle habit, as opposed to serving as a mere academic exercise. Once you develop the habit that conforms to your budget allocations, then you may not need to track your expenses, except in a general sense to advise allocation adjustments for inflation, etc.

  8. This is a great list of New Years resolutions. I would add two things:

    1. When making a budget, look for ways to cut spending, from changing a gym membership to switching banks to re-assess grocery expenditure. You’d be surpised what you decide you can do without–they key is to do the self-assessment. Put the saved money directly into savings or investment.

    2. Plan to make just a little more money each month than budgeted, then save that money. One of my favorite ways to make extra money is attending focus groups. You might also think about becoming a paid research subject for research projects. These can sometimes pay quite well.

    Any other ideas?

  9. Thanks for the advice. Couple of good nuggets.
    Couple of comments.
    Emergency fund. I agree, but with the caveat that you define “emergency”. Hurricane is a good one. The problem with most people is that if you don’t specify what an emergency is then anything can be an emergency. The car needs major repairs or replacing, the roof needs fixing, etc. etc.

    Pay out the credit cards. Yep. But don’t cut up the last one. Keep using it. Reduce the limit to 500 if you have to but keep it active some way.

    Budget. Yep. Just don’t forget to include some “fun” or “other” expense money. Reward yourself every month for doing such a good job at keeping to the budget. Celebrate the small things.

  10. This post is about making personal finance resolutions for 2006. He enlisted help from Jim, FMF, Flexo, Smarty, Jose, Alexander, and Jonathan. Together, they cover emergency funds, getting out of debt, 401ks, IRAs, budgets, and personal finance statements. It’s worth your time to read every bit and reference every link.

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