Now that the New Year is underway, it's time to stick to those resolutions you promised to keep. And if you're like the many Americans who made resolutions of the financial sort, now is the time to develop a realistic game plan.
According to Fidelity Investments' fifth annual New Year Financial Resolutions Study*, a record number of Americans made financial resolutions in 2013. More than half (54 percent) of us resolved to save more, spend less and improve our financial habits, up from 46 percent last year and 35 percent in 2009.
Of course, resolutions are easier to make than keep, and old habits tend to die hard. But there are actions we can all take over the next eleven months to help lay a foundation for long-term financial wellbeing, and strengthen our resolve incrementally over time.
The shift to thrift
So what are Americans' top financial priorities?
According to Fidelity's study, more than half (54 percent) of us listed "saving more money" as our top resolution. "Paying off debt" was second at 24 percent, followed by "spending less money" at 19 percent. This shift toward thrift comes as no surprise. It is a continuation of a trend that started among American consumers following the economic recession of 2008-09. Over the past year, the U.S. personal savings rate grew to 4.9 percent, up from 2.9 percent in 2007**.
Equally interesting, consumers are now saving for short-term expenses (e.g., vacation, major purchases and emergency funds) as well as long-term priorities (e.g., retirement, college funding). While long-term planning still prevails (53 percent vs. 39 percent), the gap is shrinking, which suggests Americans are better able to plan and save for major discretionary purchases than they were several years ago.
This is cause for celebration, since establishing a balance between long and short-term planning is important and keeps us on track. To maintain the balance, it can be helpful to break goals down into month-by-month steps and monitor progress throughout the year. Survey respondents cited this as one of the most effective ways to achieve financial resolutions.
For best results, begin the planning process right away. Here is a sample month-by-month breakdown to get you started:
- This Month (January) - Identify new sources of savings. The most important thing you can do to achieve both short and long-term goals is to create a budget. Begin by pinpointing your essential and discretionary monthly expenses and then compare them to your income. Review this information and see if you can cut costs, pay down debt or save more. If you haven't already done so, create a liquid emergency fund of at least three to six months' salary to cover expenses in a pinch.
- February - Focus on retirement. Make sure you are saving as much as possible -- at least enough to take advantage of any matching contributions offered by your savings plan at work. Also take time to check out your portfolio's asset allocation to make sure you have the right mix of assets to meet your goals. Younger investors should pay close attention to whether their portfolio is too conservatively invested, since this can limit long-term growth potential.
- March - Organize your tax documents. Now is the time to gather up all your paperwork, like W-2 forms and receipts, and start preparing your 2013 taxes.
- April - Consider opening/funding an IRA. Making tax-smart investment decisions doesn't have to end when the new year begins. Contributions to an IRA can be made until April 15, and may potentially reduce your 2013 taxable income dollar for dollar, if certain requirements are met. The IRA contribution limit for 2013 and 2014 is 5,500; 6,500 for those age 50 and older. Also, if you get a tax refund, consider using some or all of that windfall to fund an IRA.
- May - Revisit college savings. If you have children, now might be a good time to ramp up your college savings. Consider a 529 college savings plan, sponsored by a state or state agency. Your savings grow tax-deferred, and you can withdraw the money federal income tax free, as long as you spend it on qualified higher education expenses.
- June - Update beneficiaries. Because you spend a lifetime building your savings, it's important to carefully consider who will inherit your assets. Review beneficiary designations on retirement and non-retirement accounts, as well as assets like your home and bank accounts. Many life events (e.g., death, divorce and/or the birth of a child) may impact your current financial plan.
- July - Check your account mix. Summer is a good halfway checkpoint to review the budget you made in January. It's also a good time to re-examine your asset allocation to make sure your investment mix still makes sense. If possible, consider boosting your contribution rate to your IRA or workplace savings plan.
- August - Pay down credit card debt. If you have credit card debt, consider paying it down now. The interest you pay every month on credit card balances can keep you from getting ahead.
- September - Consider consolidating your accounts. Combining several accounts under one roof tends to allow for more control over asset allocation and diversification. Having a holistic view of your overall financial picture can potentially lead to lower fees and enhanced levels of service.
- October - Start year-end tax planning. The smart investing moves you make now may help reduce next year's tax burden. Consider increasing contributions to tax-advantaged accounts (if possible) and investigate education credits, energy efficiency credits and other forms of tax savings. Calculate investment gains/losses and weigh the benefits of selling stocks as a tax-loss harvesting strategy.
- November - Review health and workplace benefits. Most companies offer open enrollment for benefits during November. Perhaps you've changed jobs, gotten married or welcomed a new baby into the family. If so, review your coverage and benefits to see if they still meet your needs. If available, weigh the comparative advantages of traditional and high-deductible health insurance plans (HDHP) and consider contributing to a healthcare savings account (HSA).
- December - Review the year-end tax plan you started in October. December is a good time to look at the year in review and decide where you may want to make changes on an ongoing basis. It's also a good time to look for opportunities to make charitable donations, which can potentially lower your tax bill in addition to helping others. Year-end is also the deadline to convert traditional IRA assets to a Roth, if appropriate. For retirees, December 31 is the deadline to take mandatory required distributions (MRDs).
While some steps may be easier to implement than others, your decision to develop a proactive plan and monitor progress throughout the year will help you keep your resolutions in 2014, and beyond. In the process, you'll create new, constructive financial habits that put you on the path toward long-term financial security.
Kathy Murphy is president of Personal Investing, a Fidelity Investments company. She oversees as business with more than $1 trillion in assets under administration, more than 13.5 million customer accounts and more than 10,000 employees.
* The Fidelity Investments fifth annual New Year Financial Resolutions Study is a national telephone survey of 2,027 adults, conducted from November 7-11, 2013 by ORC International.
**U.S. Department of Commerce, Bureau of Economic Analysis
Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.