This New Year, Get Your Finances in Order

At last, 2021 comes to a close. We’re approaching the end of a second year of unprecedented financial challenges, uncertainty and unknowns. COVID created what many call our “new normal” these past 2 years and changed many of our lives forever. From learning to work remotely and embrace technology, to virtual classrooms, job layoffs, illness among friends and family, strapped budgets and more, Americans have struggled – and yet we’ve persevered. We’ve taken our emotional and financial hits, but we’re a resilient country and we won’t give up. As we enter a new year I, feel a sense of optimism for 2022.

Sure, we will continue to deal with the virus and its various strains, but I think most of us are smarter now than when the year began. For example, when supplies ran low, we had to become more planful to ensure our families had toilet paper on hand. When personal interactions were curtailed, we got creative about ways to socialize without risking the health of our loved ones. Who would have thought virtual happy hours became so popular! 

And for many folks, we experienced first-hand just how important it was to have a comprehensive financial system designed to deal with the financial setbacks that come our way. When the markets reacted to COVID last year with a crash, those who had a plan for the unexpected were much more likely to come out of the crash unscathed, or at least relatively intact. 

For those of you who were not as well-prepared, there’s no time like the New Year to reflect on the past year and set the stage for a brighter 2022. Now, if you’re someone who likes to make resolutions on New Year’s Day, you already know how hard it is to stick to them. But it’s crucial for your financial success to make your money a priority – and to stick to your goals long-term. You probably have motivation on your side right now, too, so this week I’d like to look at a few areas you can focus on to kick start your financial year.

For starters, set good goals – but don’t go crazy. You’re more likely to stick to your plan if your goals are realistic. Sometimes a smaller goal will help you make progress toward your larger goals.

And one of the best things you can do is stick to a budget. Whether you’re new to the budgeting process or perhaps have let your discipline wane, now’s a great time to commit (or re-commit) to understanding where your money goes. It’s through the budgeting process that you’re able to save and invest during your working years to accumulate wealth over time, which enables you to achieve many of life’s most important goals. 

At a minimum, be sure to have a high-level budget with three things: how much you’re taking in after taxes, how much you’re spending, and how much you’re saving. If you’re not sure where your money is going, track your spending using a spreadsheet or an online budgeting tool for 30 days. 

You need to understand exactly how much money you need to cover your fixed monthly expenses, such as your rent or mortgage and other living expenses, and how much you’d like to put away for other goals. You can then calculate your personal net worth by making a list of your assets (what you own) and subtract your liabilities (what you owe). Subtract the liabilities from the assets to determine your net worth. If you’re retired, you’ll want to also plan an income and distribution strategy to help make your net worth last as long as necessary and to support other objectives.

Also important for retirees is to invest your living-expense money conservatively. The typical accumulation buy and hold model split between stocks and bonds may have been fine during your working years, but as you near retirement you don’t have the time to make up a significant loss if the market tanks and you need to draw income. Be sure to review your portfolio with your advisor to ensure you don’t have a “let it ride” system in place.

And no sound financial system is complete without a solid downside risk mitigation system (DRMS) that uses quantitative data to help put you in the highest probability of financial success. You see, we all share the goal of getting better investment results, but this can’t be at the expense of your ability to sleep at night. Investing too heavily in the markets without a DRMS is downright dangerous for a current or soon-to-be retiree. If the market takes a dive while you’re drawing income from your investments, your portfolio may never be able to recover, and you could find your nest egg depleted much too soon.

Finally, remember you don’t have to do everything at once. There’s a lot you can do to improve your financial health by taking one step at a time and make some real progress on your journey this year. As someone once said, “Tomorrow is the first blank page of a 365-page book. Write a good one.”

So as always – be vigilant and stay alert, because you deserve more!

Have a great week and a Happy and Healthy New Year.

Jeff Cutter offers investment advisory services through Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at jeff@cutterfinancialgroup.com.

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