Financial Resolutions to Start the New Year Off Right
Looking for ideas to improve your finances during the upcoming year? Consider the following seven suggestions for New Year's resolutions.
· Commit to saving regularly. Small amounts of savings add up. If someone saves $2,000 per year from age 20 to age 66, they would have $975,000 accumulated after 46 years, assuming an 8% average return. Savers who wait until age 30 and save $2,000 per year for 36 years would have $440,000 and those who wait until ages 40 and 50 and save $2,000 per year for 26 and 16 years, respectively, would have $188,000 and $73,000. Pay yourself first. Before paying bills and other financial obligations, set aside an affordable amount each month in accounts designated for long-range goals and unexpected emergencies.
· Take advantage of higher contribution limits for both individual retirement accounts (IRAs) and tax-deferred employer retirement plans such as 401(k)s, 403(b)s, and Section 457 plans. These higher limits are available to all workers with earned income regardless of age. In addition, there is a special catch-up provision for people age 50 and older. The maximum contribution for IRAs (either Roth or Traditional) is $3,000 + $500 catch-up ($3,500 total). The maximum contribution to tax-deferred employer plans is $13,000 + $3,000 catch-up ($16,000 total).
· Maintain a low debt-to-income ratio. Monthly consumer debt payments should be 15% or less of monthly take-home pay. Example: $275 of debt payments divided by $2,500 of net pay equals a consumer debt-to-income ratio of 11% (275 divided by 2,500).
· Accumulate an emergency fund of at least three month's expenses. Keep this money liquid in cash equivalents such as a credit union account, money market mutual fund, or short-term CD. It may take a few months to a year to accumulate an adequate reserve. That's okay. The trick is to get started now and save regularly to accomplish this goal.
· Develop your human capital. The most recognized way that people invest in human capital is through formal education that leads to a college degree, trade school certificate, or high school diploma. Other ways to develop human capital include on the job training and experiences, non-credit courses, and self-employment or consulting work that broadens one's skill set and/or professional network. Another way of investing in human capital is by spending time (e.g., exercising) and money (e.g., eating nutritious food) maintaining one's health. The results are fewer days of sickness per year, a longer life expectancy, higher productivity at home and at work, and lower health care expenses.
· Increase your personal financial literacy. Knowledge is power. For example, knowledge of investment principles can prevent costly errors such as panic selling during stock market downturns and market timing. Appreciation of compound interest may provide motivation to make monthly deposits to a mutual fund and roll over lump sum pension distributions to another tax-deferred plan instead of spending the money and incurring tax penalties.
· Perform an annual financial check up. Periodic financial check-ups are as important as a routine physical exam to identify problems and potential remedies. A helpful self-assessment tool, which also provides data for ongoing research about the frequency with which various financial practices are performed, is Rutgers Cooperative Extension's online Financial Fitness Quiz at www.rce.rutgers.edu/money/ffquiz. Two additional self-assessment tools are the Identity Theft Risk Assessment Quiz at www.rce.rutgers.edu/money/identitytheft and the Investment Risk Tolerance Quiz at www.rce.rutgers.edu/money/riskquiz.