New Year, New Plan
By: Geoffrey J. Rejent
What changes are you looking forward to in 2019? Most people create a list of goals or resolutions early on, yet by the spring, the goals or resolutions are long gone or forgotten about. This happens constantly with money and personal finance. Does improving your financial situation require you to pay off debt, sell a house or an automobile, establish a savings account or consider investing for college savings or retirement? Our goals need to be specific, attainable and measurable. Someone who wants to get serious about their finances in 2019 would focus on the following goals: create a budget, establish savings accounts, pay off outstanding consumer debts (credit cards or vehicle loans), invest in supplemental retirement accounts, establish college savings accounts for your child or children and, if applicable, pay off your mortgage.
Creating a budget is the best way to get your financial situation back on track. This is the most important goal for the upcoming year. In order to get your financial affairs in order, you must create a budget. When creating a budget, you must determine your monthly income. Once you determine your average monthly income, you need to subtract all your expenses. Be reasonable and realistic when drafting your budget. The goal of a successful budget is to have more money coming into your bank account (paychecks) than what is going out (expenses).
Once you have created and started utilizing your budget, you need to establish a small savings account for emergencies. This savings is meant to cover unforeseen emergencies like an insurance deductible if you are involved in a motor vehicle crash, the cleanup and repair if a pipe bursts in your residence, etc. The amount that should be in this emergency savings will vary depending on your situation (usually a few hundred to a thousand dollars), but the main objective is to have this money to avoid using a credit card or taking a loan when a small emergency occurs. Once you have paid off all your consumer debts, you need to add more money to your savings account. Can you survive if you get hurt and get put on disability? What if you or your spouse lost your job? I would recommend having at least three months of salary saved. Don’t worry about how much interest you are earning on this money. Earning interest on this money isn’t the objective; it’s simply an added benefit. Your savings account will be there to protect you from big emergencies. You should build your savings account right into your budget. I would also recommend establishing other separate savings accounts for larger ticket items such as a vehicle purchase or home improvements. Doing so would prevent you from racking up debt in the future.
Debt is an impediment to financial success. In order to dramatically improve your financial situation, you must do two things with debt; the first is not add to it and the second is to pay it off as quickly as possible. Paying off debts can be accomplished by making cuts in your budget and working more (i.e. earning overtime or getting a second job). There isn’t any magic here. Your goal is to pay the debts off as soon as you can to minimize the interest you will pay.
If you have been so disciplined that you either achieved all those goals or if you are starting the year off in a better financial situation than most, you may want to consider investing. Everyone needs a comprehensive retirement plan. Don’t assume that a pension plan will cover all your retirement needs. Consider this: We are all at a risk of job loss for a variety of reasons. What if you terminate from your employer before you can collect on your pension? You want to invest your money in a Deferred Compensation Plan or another investment vehicle like a Roth IRA. Speak to a financial advisor and have him or her guide you. It is best to take the time to speak to a few different advisors. You should feel comfortable speaking with your advisor and you should seek out someone who wants to teach you about investing. You want someone who is going to listen to you and tailor your plan to your life. If you have children, you would definitely want to consider saving for college. Two of the most popular options are 529 accounts and Educational Savings Accounts (known as ESA’s). I would recommend establishing both types of accounts, because ESA’s have a maximum contribution per year which is capped at $2,000. Once you reach that threshold, you could continue to save more money within the 529 account.
If you are so fortunate or disciplined to accomplish all the other goals, your focus should be to pay off your mortgage. Whether you make payments bi-weekly, pay additional principal each month as part of your regular payment or follow some other type of pre-payment plan, you will be making progress on paying down or paying off your mortgage. Pre-paying your mortgage will save you significant amounts of money, because pre-payments will help minimize interest you will pay over the life of the loan.
The new year gives you a great opportunity to reset your life and your finances. You have the ability to make up for previous mistakes or setbacks. Setting financial goals that are achievable will help you improve your financial situation and help alleviate a lot of the stress that you may face in terms of financial health. Good luck with achieving your goals in 2019!