The top three financial resolutions most people have each year are to “save more”, “spend less”, and “pay off debt”.
A typical New Year's resolution is to be healthier, but in order to achieve that, you will have to make a year-long effort to follow through with dieting and exercise. However, the following three action items can help you cross off some of your financial resolutions before the end of January.
1. [Save More] Increase your 401k contribution PERCENTAGE.
Did you know for 2016, “maxing out your 401k” means that you’re contributing $18,000 of your pre-tax* salary to your 401k? (For a Roth 401k, the annual contribution limit is $18,000 post-tax.) This means if you make $50,000, you would need to contribute 39% ($18,000 / $50,000) of each paycheck to your 401k. Not quite there yet? That's okay. Baby steps. But now, at least you know what to strive towards.
Some of my clients thought "maxing out your 401k" meant contributing the same percentage their company would match. This simply isn't true. Some companies describe their match as "100% on the first 3%" or "50% on the first 6%" -- both of these effectively equaling 3% of your salary. It's always a good thing to take free money, but that still doesn't mean you've maxed out your 401k.
In the above example, if you chose to contribute 6% of your income, $3,000 of your salary would be deposited into your 401k account over the course of the year. If your company matched 50% on the first 6%, that means an additional $1,500 would be added to your account.
At a minimum, you do want to contribute enough to your 401k to take advantage of your company match. But let’s not stop there. 2016 is about saving more.
// Action item: In 2016, contribute at least 2% more to your 401k than what you did in 2015.
Did you get a raise this year? Act like you didn’t get one and put that percentage towards your 401k.
*Utilizing pre-tax accounts such as 401k plans or health savings accounts (HSA) means you'll have less salary to be taxed on come April.
2. [Spend Less] examine your recurring expenses.
Sure, everyone uses the “cut back on Starbucks” or “eat out less” examples, but there may be other ways to lower your monthly expenses without materially sacrificing your lifestyle. You just have to put in the effort!
Start with a list of recurring expenses. Many are probably auto-debited from your accounts: cell phone bill, cable TV, internet, gym membership, car insurance premiums, etc. .
See if there are opportunities to shop around for better rates (yes, it’s a pain, but it’s worth it). Whenever I threaten to leave my car insurance company, I magically get redirected to a “special department for valued customers.”
Evaluate necessity. Do you really need the premium channels on cable TV? How many times do you actually go to your fancy gym each month; would you be better off buying per-class passes or becoming a member at your local Y?
Find creative alternatives. Could you make your cell phone “family” bigger to help spread out the costs?
Personal example: Some sports fans might be outraged at this idea, but my husband and I cut the cord on cable TV. We were spending $100 a month on cable TV ($1200 per year!) so my husband could get access to one channel: ESPN. Instead, we subscribed to NBA League Pass ($200 for the year), got Apple TV so I could still watch my network shows, and if he really wants to watch a game, he is more than welcome to go to a sports bar with friends. The cost of beers would still not equate to $1200 per year.
// Action item: Identify and lower ONE recurring monthly expense.
3. [Pay Down Debt] Understand your debt situation.
Yes, there’s a part of you that is screaming “Avoid! I’ll deal with it later!” The first step to paying down your debt is facing it. How much debt do you really have? Sure, you’re paying your minimum monthly payments on time, but do you realize how many years it’ll take to pay off everything and how much interest you’ll have paid? (A lot.) I don’t need to lecture you because the numbers alone will speak for themselves.
There are a few ways to order your debt – by highest to lowest interest rate or by lowest to highest outstanding balance. Conventional financial wisdom would tell you to pay down your highest interest bearing loan, because who wants to pay more interest? But, psychology would tell you to pay down your lowest outstanding balance first because you’ll get emotional satisfaction of crossing that off your list which will motivate you to continue. You know yourself best which method works better.
After seeing the numbers, it might just motivate you enough to face your fears and get your debt situation under control.
// Action item: Run a debt snowball calculator and use the money you’ve saved from #2 to pay down additional debt.
Each of these three steps offers a way to start off the new year financially focused and most importantly, improve your financial future. Happy new year!