Here’s To Your Financial Fitness In 2016

13222673_sThe most popular New Year’s resolution last year was, no surprise, to get in shape, physically. It was also, no surprise, the most commonly broken resolution.
Resolutions are rarely successful. Why? Because positive change is made by habit, not by resolution. And habits must be acted upon at the beginning, middle and end of every day, not just at the beginning of the year. But we can’t help but get caught up in the January 1 traditions. So rather than trying to eradicate resolutions for 2016, let’s focus on our financial health and commit to getting financially fit.
Have you ever been to a gym in the first few weeks of the new year? There isn’t an empty exercise machine as far as the eye can see. My hope is that the offices of financial advisors across the country are just as packed this January.
But, just as signing up for that gym membership is simply a step in the right direction, your financial fitness does not transform with one appointment; you need to commit to healthy habits throughout the year. That being said, here are a few simple, and powerful places to start.
The first step to becoming financially fit is to create a budget. A budget is your financial road map. It is at the heart of every successful financial plan. Of the hundreds of folks we help each year, I must say, the more successful ones all have one thing in common—a budget. So, don’t make it more complicated than it needs to be. Use a spreadsheet or online tool to begin tracking your income and expenses and use that as a framework to start a budget. Look to see where you can cut back. You are probably spending more on things like your daily coffee than you realize. Also look to make sure you are “spending” money on important things. For example, be sure to pay yourself first. I always ask, “How much are you saving?” Most say that they save whatever cash is “left over” at the end of the month. This year, make saving for your future a forethought and not an afterthought. If you set aside a specific amount each month before you start allocating for other more discretionary expenses, you have begun the process of building your financial future.
When creating your budget, you also should take a look at the bigger picture to project what your financial year will look like. Will you be purchasing a new car in the coming months? Maybe this summer is the one when you finally buy that boat you’ve been dreaming of. Or you have a senior in high school and you know the cost of college will come around in the fall. It’s these big expenses that can easily throw off a plan, so make sure you work them into the fabric of your financial canvas.
A budget allows us to prepare for the expected. But, what about the unexpected? Nothing will throw a budget into a financial tailspin more than an emergency. Emergency funds are like spare tires: you never think about them until you need one. The situations that can create a need for extra money are almost endless—divorce, health issues, car troubles, emergency travel, job loss—the list goes on. So, create an emergency fund if you do not already have one. How much should you save? The bare minimum in your emergency fund should be enough to cover three months of household expenses.
Another way to put your financial fitness resolution into effect is to deal with your debt. There are two types of debt, constructive and destructive. Constructive debt can be beneficial. An example of constructive debt would be a home mortgage; if paid on time every month, it can help to build credit as well as the opportunity to accumulate equity in a home. But remember that bad things can happen if you have too much of a good thing. Try to keep your mortgage payment between 25 to 30 percent of your income.
Destructive debt is high cost, non-deductible consumer debt. Try to get rid of your destructive debt. Pay off credit cards and avoid borrowing money to buy depreciating assets, such as cars and boats. Those who are financially fit understand the differences between constructive and destructive debt.
Another way to become financially fit, that is often overlooked, is to implement a sound investment strategy. I find that while many folks desire a sound strategy, they do not know the questions to ask to implement one. So here are some suggestions. Have you back-tested your strategy to see how it behaves through a market cycle? (A market cycle is historically five to seven years.) What are your downside risk triggers? Do you have any? How did your strategy behave in down years, one such as 2008? Was it acceptable? What is your appetite for risk? Getting answers to these questions will put you on the right track to a sound investment strategy.
The last part of a resolution to get financially fit that must be addressed is estate planning. A well-thought-out estate plan can save your loved ones from paying unnecessary taxes and fees, and isn’t this what we are all hoping to do? Make sure you have a will and other estate documents in place. Ask whether you need to make any changes to your plan. Consult with an estate planning attorney and ask if there are any tax law changes that require you to make adjustments.
Folks, make 2016 your year to secure your financial health. My resolution for 2016 is to continue to help the Cutter Family Finance faithful to be vigilant and to stay alert. I wish you all a happy and healthy new year!