By JLP | December 28, 2005
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:
- Blueprint for Financial Prosperity – Setting up an Emergency Fund
- Free Money Finance – Where to Save Emergency Cash, Financial Emergency Kit, and Why an Emergency Fund is Important
- Consumerism Commentary – Emergency Funds, Doing Okay?, The Emergency Fund, and the Latest Checking and Savings Account Rates
- Anes Weblog – A Basic Savings and Investing Strategy
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:
- Blueprint for Financial Prosperity – Don’t Save, Pay off Debt
- Free Money Finance – 8 Ways to Consolidate Debt, Four Credit Card Traps, Escape the Credit Card Trap, and Don’t Be Bullied by Creditors
- Consumerism Commentary – The Most Indebted Generation
- Wealth Junkie – Crawling Out of Debt
- FiveCentNickel – Dave Ramsey is Bad at Math, Opt Out of Pre-approved Credit Card Offers
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:
- Consumerism Commentary – Friendly IRA Reminder
- Growing Money – Roth IRA and Roth IRAs Often Beat 401(k)s.
- MyMoneyBlog – Which Broker for my Roth IRA?
- FiveCentNickel – Reshuffle Your Retirement, Reshuffle Your Retirement, Part Deux, Max That Roth!, Turn $1/Day into $67,8715, and Ratcheting up Our Roth IRA Contributions
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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