It’s that time of year again! Gym memberships are going through the roof. Everyone is having salad for lunch and skipping the chocolate. As you start working on your New Year’s Resolutions for 2015, don’t forget to get your financial house in order.
Whether your goal is to pay down credit card debt or start saving for retirement, our Wealth Planning Advisor, Donna Murray, has provided a short list of things you need to know in order to get fiscally fit in 2015.
1. Create a budget that you can actually live by. Instead of tracking every single category of expenditure, use the 50/20/30 rule. 50% of your take home pay should go toward necessities like housing, transportation, utilities, medical and groceries. 20% should be allocated for debt repayment, savings and retirement contributions. The remaining 30% is what you have to spend on everything else – clothing, eating out, entertainment, etc. You could divide this 30% into a weekly figure and then pay for these things with cash. When the cash is gone, you stop spending until the next week.
There are several free apps/websites that can help keep your finances on track.
Be sure to review all of your recurring expenses – cable, cellphones, gym membership, magazine and newspaper subscriptions, etc. Are any of these services that you no longer use? Are you paying for more than you actually need – movie channels that you never watch, for example? Analyze all of them for usage and value, cutting out those where you aren’t getting your money’s worth.
2. Pay down credit card debt. Approximately 46% of households have credit card debt that they carry month-to-month and of those households, the average balance is $15,000. If you’re one of these folks, begin by making a list of all your debts by interest rate, ordered from highest to lowest, plus the minimum monthly payments. Of course always make at least the minimum payment. Additional available dollars should go towards the debt with the highest interest rate. After you pay that one off, move to the next-highest interest rate debt.
3. Develop an automated savings plan. You need a minimum amount of cash reserves equal to at least three, preferably six, months of your living expenses set aside for emergencies. You can set up an automated transfer from your checking account to your savings account each month.
4. Plan for retirement. You can find several online calculators that will generate an estimate of the amount you need to save by retirement to maintain your lifestyle. For a rough estimate, you can multiply your current salary by 12.
After you have paid off your credit card debt and have set aside cash reserves, you need to max out your retirement contributions in a 401(k) or IRA. If your employer offers matching contributions in your retirement plan, be sure to contribute enough to get the full match.
5. Rebalance your investment portfolio. Rebalancing can be a critical element in helping reduce the risk of a portfolio, while insuring it remains aligned with an investor’s original investment plan. Over time, the asset mix in a portfolio can drift, especially during periods of extreme volatility. If an asset class performs well for an extended period of time, it can grow to become a higher percentage of the overall portfolio and subsequently have a much greater impact on the intended overall risk and return of the portfolio moving forward.
6. Review your insurance coverage. Insurance isn’t the most exciting New Year’s resolution, but it is one of the most important. Consider insurance your safety net. All of the things we have mentioned so far are important, but those long-term plans can be put on hold indefinitely by things like long term disabilities, complex health issues and other disasters. Insurance takes care of the financial end of those problems so you can focus on solving everything else.
Long term disability insurance is crucial for anyone with an income. Without this insurance, you could lose years worth of income while you recover from an injury or illness. A good rule of thumb is that you should have a policy that at least covers 60% of your salary in the event of a disability. Life insurance is also very important, and most folks in their working years should have at least 10 times their annual income covered by term insurance.
7. Dust off your Will. 70% of Americans don’t have a will and of those that do, most have outdated estate documents.
- If you have dependents, no matter how little or how much you own, you need a will to determine who is responsible for your children if you are no longer here.
- If you die without a will in South Carolina, if you’re married with children – your spouse gets ½ and the kids get the other ½.
- You also need Durable Power of Attorney to name someone as your agent to handle financial matters and Medical Directive documents to confirm your healthcare wishes if you are unable to do so.
- Some assets pass outside a will, including life insurance and retirement assets. Make sure the beneficiary designations are updated and coordinated with your will.
The first step will always be the hardest. If you begin to focus now, this can really pay off throughout 2015 and your entire future!