Regardless of how much money you earn, cash flow is the foundation upon which most of financial planning is built. Understanding what’s coming in and going out can help you determine what is available to fund various goals, including debt pay-down, college funding and retirement planning. That’s why nearly every CERTIFIED FINANCIAL PLANNER™ professional (CFP) will start a client relationship asking about how much money you spend today. If you don’t know, she may encourage you to create or adhere to some type of tracking system. Cash flow is probably the least sexy part of planning. In many ways, it’s like dieting and exercising because it relies on self-control and discipline. The best personal trainer can create an effective work out regime, customized to your body type, but she can’t force you to do the squats and dead lifts. Similarly, a nutritionist can design a diet plan that will help you manage your weight, but only if you stick to it.
“Money can’t buy happiness, but it can make your misery a little more comfortable,” or so my father once said. I have also come to believe that while money can’t buy happiness, it can buy you options. For example, with enough in savings, you may be able to make a different career decision, or you may have peace of mind that allows you to feel free from an employer’s whim or an industry’s downsizing and of course, money may allow you to retire early. But what about that jolt of glee that you feel, when you sit in a brand new car or slip on that sparkling piece of jewelry? Psychologists and behavioral economists have conducted studies, which have shown that despite a shot in the arm that a purchase or even a gift can provide, the happiness boost does not last that long. There is actually a name for this: The Hedonic Treadmill.
The practice of making resolutions for the New Year has been traced to the ancient Babylonians, who more than 4,000 years ago, made promises so that they would stay on the good side of the gods and start the year off on the right foot. Fast forward to modern times, where a resolution is less about earning the good favor of a higher power and more about making a promise to yourself that will enhance your life. According to Allianz Life Insurance Company’s 6th annual New Year’s Resolution Survey, the majority of Americans “will be more concerned about their waistlines than their wallets.” Maybe as the economy improves, people have become less focused on their financial lives, because only thirty percent of respondents said they plan to focus on money resolutions for 2015. A Fidelity Investments survey saw similar results and also found that among those considering a financial resolution, the top three are to save more, pay off debt, and spend less.
While making those promises is hard, keeping them is the real challenge. Research from the University of Scranton suggests that just eight percent of people achieve their New Year’s goals. Before you throw in the towel, let’s try to figure out how you might be more successful in keeping those resolutions.
The first step is to write down the resolutions and don’t make too many – why stack the deck against you? Next, make the resolution concrete. For example, instead of “save more,” the better resolution is “contribute six percent of my salary to my retirement plan”. To make sure you are on track, schedule time to check on your progress – I suggest quarterly.
If you need help coming up with resolutions, you can always default to “Jill’s Big Three”:
- Zero consumer debt (credit card, auto loans)
- Adequate emergency reserve funds (6-12 month’s worth of expenses; 12-24 months for retirees)
- Maximization of retirement contributions (for 2015, $18,000 for 401(k), 403(b) and 457 plans, with an additional $6,000 catch up contribution available if you are over the age of 50; and $5,500 for IRAs, with an additional $1,000 catch up contribution). Don’t forget that you need a properly diversified portfolio that is consistent with your risk tolerance level.
For many, conquering the Big Three will require some time and energy. The process may even require you to (gasp) figure out where your money is going. The easiest way to do that is to track your expenses for three months. After doing so, you may find that there’s extra money available to help your efforts.
Once you have these covered the Big Three, you are not off the hook. You also need to draft/update wills and other estate documents; review insurance coverage (life, disability, long-term care and property and casualty); and make sure that you are taking advantage of all employee-based benefits that are available.
What comes next? That’s up to you. Do you want to buy a second home in the next year or two? If so, you may need to channel all available cash flow into a down payment fund. Are you ready to set aside some of your precious free cash flow for your kids in a Section 529 Plan or would you prefer to aim for early retirement? Do you need to think about caring for your aging parents? If so, have you had the tough talk with them to see what their wishes are?
These are just some of the questions that you need to consider how to prepare for your financial future. No wonder 92 percent of resolution-makers abandon the project! But with a well thought-out plan, you may find that those resolutions are just what was needed to help you reach your financial goals.