The new year brings with it lots of well-intended resolutions, many of them financial. But it can be easy to procrastinate on money matters when you’re unaware of the consequences of inaction or unsure whether you’re making the right decisions.
Even for a financial planner, the process of setting and achieving financial goals can be overwhelming. This past year, although I focused on specific aspects of my finances, I didn’t take the time to identify important life goals for the year. I did not use my money to ensure that I was enriching my life.
So, like many others, I’m rededicating myself to the process as a New Year’s resolution. To organize and improve your finances in the year ahead, dedicate time each week to following these eight steps:
1. Set goals
Discuss your short- and long-term goals with your family, spouse or significant other. If you’re single, create a list for yourself. This is the most important step. Ask yourself what you want to have, to do, and to be over the next six or 12 months. Be as specific as you can and brainstorm as many items as possible. Next, prioritize these items by picking your top four or five. Assign a realistic cost to these goals to see if they are achievable within your budget.
2. Develop a new budget
Review last year’s spending and determine how it aligns with your values and your goals. Then, develop a new budget using last year’s as a benchmark. Shift your expenses where appropriate to reflect your core values while also incorporating the top four or five priorities from Step 1. Some of these goals will have a cost associated with them; others may not.
For example, my 2021 priorities include doing some maintenance on my home, attending a Coldplay concert, taking regular art lessons, vacationing for a week with my family and good friends in Utah, and creating more balance in my life by simplifying work processes. The estimated cost for the first four items was pretty straightforward, and I added those expenses to my household budget.
Not all of your goals have to be associated with money; creating more free time in your schedule is a good example. For busy professionals, time can be more valuable than money.
3. Open multiple savings accounts
Set aside specific, separate savings accounts for some of the goals that you have established. For example, you may want to have a separate savings account for a vacation, the kids’ education, a new car purchase or a special entertainment expense.
Why separate accounts? This helps ensure that you won’t raid savings for one expenditure to use for another, making it easier for you to spend money where it matters. Also, it can be easier to part with money associated with a personal goal or expenditure if there’s an account specifically designated for that money.
4. Create a summary sheet of your net worth
This should include the value of all assets you own, such as real estate, cash, investments, the cash value of life insurance, art, jewelry and cars. Then list the amounts you owe, such as for car loans, mortgages, credit card debts and student loans. The difference between what you own and what you owe is your net worth. Ideally, your net worth is growing each year as you increase your savings for retirement and reduce your debt.
5. Summarize your insurance
Create another summary sheet for your health, life, disability, liability and long-term care insurance policies. Know when these policies expire and the basics for each one:
- How much will you spend out of pocket in a year with your health insurance before the insurer pays in full?
- How much would you receive in life insurance proceeds if someone in your family were to pass away?
- How much would you receive in after-tax dollars if you were to become disabled?
You may also want to evaluate the cost of life insurance through your employer compared with the cost of an individual policy. Group life insurance plans tend to be more costly once you reach age 45.
6. Review your investments
See if your total exposure to the stock market makes sense given your risk tolerance and personality and your proximity to retirement. In general, it’s wise to reduce your risk five to seven years prior to and after retirement to avoid sharp losses during this critical time period.
7. Do an estate plan checkup
This includes checking the titling of your accounts, your beneficiary designations and your estate planning documents to see whether they still apply or whether any changes are necessary. If it’s been five or more years since your last estate-planning documents were prepared, you’ll probably need to schedule a visit with your estate-planning attorney for some revisions. If you don’t have a will, get one drafted as soon as possible. Dying without a will can create some nasty consequences for those you leave behind.
8. Organize your financial documents
Create a file for all of your financial documents, including investment accounts, wills and other estate-planning files and personal records. This should include a list of all current credit cards, your driver’s license, a list of bills and monthly debits, the location of your safe deposit box and keys, marriage and birth certificates, passports, social media and electronic passwords and accounts, and a video recording of your home contents. Any personally identifiable information should be in a secure, encrypted electronic file or in a safe deposit box.
The bottom line
Each item on this list is important, but you don’t have to everything all at once. Schedule time each week to work on your financial to-do list so it’s not so overwhelming. A certified financial planner can help you organize and optimize your financial life and work with you as your accountability partner.
Whether you work with a planner or tackle these steps on your own, it’s important to set yearly goals and do the work to simplify and improve your financial picture.