The start of a new year is a good time to reflect on the past year -- the successes, mistakes and, most importantly, how to improve in 2013. Getting your financial house in order is a common area of focus for resolutions. Here are six resolutions that can help get your finances in better shape in the new year.
One: Make the new year a new start for your finances. This is not the time to dwell on and live in the past, but rather, learn from your mistakes and move forward with a plan. Pinpointing where you went astray in 2012 can help shape your behavior in the upcoming year. To gain control of your finances, take one day at a time and understand that change does not happen overnight. Celebrating each small success -- such as sticking to a shopping budget or cutting back on entertainment or eating out -- helps build a sense of control and confidence over your financial life. When hiking a mountain, it can be overwhelming to look all the way up to the top and imagine all the perils and challenges along the way, while focusing on the path immediately ahead of you can make the climb less overwhelming.
Two: Recognize that cash flow is king. You cannot truly gain control of your finances without first understanding your monthly cash flow, which entails your total income and expenses. To build a sound budget, you need to know how much you make and spend on average in a month. As a starting point, track your cash flow over the next three or four months. While there are many twists and turns in the world of finance that are beyond your control, your personal cash flow is largely within your control.
Three: Get a firm grasp of your fixed costs. It's essential to get a handle on your fixed costs to manage your cash flow. Add up expenses such as mortgage, utilities, living essentials, car payments and any credit card debt. Often, fixed costs add up to more than many people expect. Often, an understanding of fixed costs leads to a need to re-assess discretionary spending.
Four: Cut back on discretionary spending. This is difficult for many, especially in our consumer-focused society where we are bombarded day-in, day-out with messages about new gadgets or toys we should be buying. In this post-holiday season, we are well-acquainted with this pressure. As best you can, try to tune out the noise and stay focused on your budget and plan. You may need to find ways to trim your discretionary spending habits, taking a hard look at extras such as cable, eating out, consumer products, entertainment or leisure activities. When you know what your budget is and what can be allotted for discretionary spending, you often end up being more careful and strategic in your purchases and maximizing your enjoyment because you appreciate the value and sacrifice.
Five: Invest for your future self. Saving for retirement is an important monthly budget item. The more you save in your younger years through vehicles like employer-sponsored retirement plans or Individual Retirement Accounts (IRAs), the more you benefit from the power of compounding. You will thank your younger self when retired for putting that money aside. A study that explored the impact of age-progressed facial images on savings behavior found that, "To people estranged from their future selves, saving is
like a choice between spending money today or giving it to a stranger years from now."
Six: Pace yourself. It's common advice for marathon runners to not start out too fast early on in a race and then run out of steam at mile five. This holds true for personal finance as well. Nothing dooms a resolution more than being too extreme and stringent in your goal and approach. With a dogmatic approach, it is too easy to go past the parameters, get overwhelmed and discouraged and, ultimately, give up on the resolution. Set reasonable goals and build your financial house one beam at a time.
While it is difficult to make true, lasting change, I see many clients get hooked on these resolutions and make big changes in their financial lives. It does not happen overnight. It is a lot like exercising, in that the effort requires commitment, hard work and some pain, but ultimately, you end up feeling more confident, in control and empowered. And better habits often snowball.
Let 2013 be the year your resolutions snowball into good financial health.
ING Retirement Coach Jacob Gold is a third generation financial advisor. He is a published author of "Financial Intelligence; Getting Back to Basics after an Economic Meltdown", which was published in August 2009. Gold is a Certified Financial Planner™ practitioner and FINRA Series 7, 24 and 66 securities registered.
Securities and Investment advisory services offered through ING Financial Partners, Member SIPC. Neither ING Financial Partners nor its representatives offer tax advice.