Know your time horizon, your emotional risk tolerance and have a clear picture of your objective. The following five financial resolutions are not new, magical or unique but they can be life-changing if they are implemented.
- Determine your financial goal.
Are you saving for retirement, if so what will retirement look like? What will it feel like? What will it smell like? Is your goal to purchase new house, if so how much are you willing to pay for it? Where will it be located? How will you feel living there?
If we don’t have a clear objective in mind, we tend to take a hit or miss approach to accomplishing it and we easily yield to other purchasing temptations.
I know, I know! I dislike creating a budget as much as anyone. I really don’t want to see where my money is going because not knowing means I don’t have to hold myself accountable. And truthfully most of us don’t want to deny ourselves of those “little things” such as daily coffee stops or eating lunch/dinner out. But suppose I find that I can stop spending $200/month eating out, and suppose I invest that money and get an average annual 5% rate of return. After 10 years the value will be over $30,000!
- Pay yourself first.
Once you have gotten an idea of where your money is going, resolve to find ways to pay yourself 10% – 20% before anything else is paid. Part of this should go into your 401k/IRA/Roth or similar investment. ALWAYS max out your employer’s match: free money is the best kind of money.
The second part of pay yourself first step is an emergency fund of at least 6 months worth of salary. We never know when an unexpected expense will occur but we know that one will happen. Without such a plan we will either have to rack up more debt or pillage our retirement fund—neither should be our “go-to-solution”.
- Periodic reviews of investment allocations.
Many people tend “to set and forget” their 401k investment selections and go year-after-year without determining whether their selections still represent their goals and objectives. If you have an advisor, make time for an annual review. If you don’t have an advisor consider hiring one.
I see many clients making simple mistakes because they don’t know the right questions to ask. I call this the “you don’t know what you don’t know” rule. A good advisor will not only know how to answer your questions but because she knows your situation she may ask other questions you didn’t even know were important to making the right decision.
- Realistic expectations.
The Rule of 72 indicates that an investment averaging 6% annually will double in 12 years. Conversely, an annual average of 12% will double in 6 years. All of us want the 12% annual return but the market historically shows that the markets can vary widely.
Beware of those who promise guarantees, who promise they can beat the system and finally be prepared for the emotional rollercoaster that the market can become. Select a risk profile that reflects your emotional tolerance.
People will often be gung-ho growth until the market drops and then they emotionally sell. Know your time horizon, your emotional risk tolerance and have a clear picture of your objective.
Implementing these five tips will make a positive difference in your financial success. As Yogi Berra said, “If you don’t know where you are going, you will end up someplace else.”
In 2019 dare to be the one who determines where you are going.
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