Procrastination is an insidious trait unique to many humans, at least as far as the rest of the Wild Kingdom is concerned. While I can certainly attest that my cat is lazy, most wild creatures recognize that waiting for tomorrow is the difference between surviving and starving to death. So, we use New Year’s resolutions as a way to commit to improving ourselves.
Most of the usual resolutions are easy to take, but difficult to stick to. Whether it’s diet, exercise or smoking cessation, January 1 is just a day. Sticking to it for another 364 is the real challenge.
In the face of the unprecedented uncertainty and unexpected financial strains many faced in 2020, setting financial planning resolutions for 2021 can seem daunting, but even small steps can take you in the right direction. Here are some tips for getting it right:
- Take inventory once a year. It takes 10-45 minutes, and don’t over-design it. Write down your assets (things you own) in one column and your debts (debts you owe) in another. Assets will include savings accounts, retirement accounts, real estate, cars, etc. The liabilities will be credit cards, mortgages, student loans, etc. Attach rough values to each. If you’re a spreadsheet type person, great, but a piece of paper works great too. Once done, you have created a household balance sheet. It’s a beginning!
- Decide to take the simple step of increasing your contribution to the pension plan from 1% to 2%. It only takes two minutes a year and can be very effective in strengthening your retirement plan. Do the math – if you make $ 70,000 a year and get paid every two weeks, increasing your pension contribution by 1% only subtracts $ 26 per paycheck. This is the most effective way to make sure that at age 65 you don’t look around and say, “What just happened? “
- Evaluate the risk you have in your investment accounts. It’s also quick – only five to 30 minutes a year – but a must. If you are young you can take more risks, and as you get older slowly back down on the risks. It can also get a bit tricky, and you should rely on a financial advisor who is trained in the risk / return tradeoffs of investments to get the most accurate assessment.
- Evaluate your expenses. This one can be the most painful, but it can also be revealing and fruitful. Plan to sit for 60 to 90 minutes every few years and track EVERY expense you have for a period of three to six months. Everyone will wonder the proverbial “why?” On at least a few parts of this list and identify ways to reduce it. When you reduce your spending, even if it’s $ 25 a month, you MUST apply those savings to your retirement plan and / or debt reduction. If you don’t, you risk starting the same cycle over again.
These resolutions are simple, but they can be powerful. Here are two real stories from many people I have seen as a counselor that demonstrate just how impactful these goals can be.
The first is a client I first met five years ago when she was 25. She began her adult life after having faced a multitude of important challenges. We discussed the need for an emergency fund, and she did. We looked at the need for life insurance when she got pregnant. She and I battled underwriting challenges with various carriers, and we eventually managed to do that, too. I said she should start a Roth IRA, and she did it with just $ 50 a month. When she had to withdraw her savings due to unforeseen circumstances, she pulled back the dial when circumstances improved. The list is lengthened increasingly. She TAKEN ACTION and continues to do so. In 35 years, she will look back and marvel at what she has accomplished.
I have another client who is 53 and had to take a pay cut during the COVID-19 crisis. For the first time in 30 years, she was sparing nothing, and it was extremely disconcerting for her. She expected me to share the angst, and to her surprise, I did not. She had spent the past three decades being rigorous and disciplined, and she had built a retirement portfolio of $ 1.15 million, despite the fact that she had never earned more than $ 70,000 a year. There was no inheritance. No lottery. That was all she did. I explained that her portfolio is expected to reach $ 2 million by age 65, even if she doesn’t add another dollar (assuming a 5% return). Because this portfolio is so strong, even in times of uncertainty, we are now in a position to consider early retirement for it.
These two “stories” are about real people. We’ll make it. The other has already done it. They took just a few minutes each year to take inventory, assess risks, protect the family, and take small steps that lead to long-term success. So this January 1, remember that financial planning is the easy way. Do not put off until next year!