The onset of a new year is accompanied with meeting friends, taking time off, reflecting on the year gone by and making new year resolutions. The new year is also a very good time to reflect on one’s finances and make some financial resolutions.
Why make Financial resolutions for the New Year?
Research shows that 31% Americans are making financial resolutions for this new year. It also found that 51% of those who made a financial resolution in January 2014 report they are better off financially today, as against 38% of those who did not make a resolution.
There is more good news. 42% respondents in the research reported that following through on financial resolutions is easier than on other common resolutions such as exercising regularly.
The icing on the cake? It is reported that, of those who made a financial resolution last year, 74% achieved at least the half way mark on their goals. 29% were completely successful!
So you have research which shows people who make financial resolutions are better off financially and well on the way to achieving their goals.
So how should YOU start?
Keep it simple, keep is short, keep it measurable and keep a record of progress.
I recommend that you make these 6 Financial Resolutions for 2015:
1. Make a Financial Plan: Start with understanding your life goals, your financial situation, your income, expenses, savings and investments, your time horizon to meet each of the goals and your risk appetite. It is not as difficult as it sounds. Hire a financial advisor or go online and use an online tool to help you make this Financial Plan.
Resolution: I will make a Financial Plan for myself by January 15th which will address my financial goals of x, y, z. (Examples? Retirement by age 40/50 with a corpus of x amount, buying a house, buying a vacation home, children’s education etc. etc.)
2. Increase your knowledge of Finance: There is no alternative to this and this is the best investment you can make. Read as much as you can on financial subjects and increase your understanding. Warren Buffett and Charlie Munger made huge fortunes by constantly reading .You can do the same.
Resolution: I will read one financial article, every day, through this year on financial planning / asset allocation / mutual funds /systematic investment plans /fixed income investing / the economy.
3. Save More and Spend Less:
Look closely at your income and how you spend it. Take a specific target for increasing your savings. Make a simple spreadsheet tracker for this or use one of the free online tools to track this. Measuring this will help you achieve this goal. Save, save and save some more.
Resolution: I will save an additional USD/Rs/Euro x per month this year.
4. Pay off all high cost debt: Taking debt to buy a house is probably the only useful debt, as you are investing in a long term appreciating asset. All other forms of debt, used for consumption are toxic for your financial wellbeing. Make a full list of all the debt you are carrying and make a plan to pay this down on priority.
Resolution: I will pay off my credit card/personal loan/high cost debt this year or I will pay off USD/Rs/Euro x per month of my high cost debt till I completely eliminate it.
5. Invest More: It is very critical for your financial prosperity that you invest the savings you have. For this, resolution 1 is critical, as your financial plan will determine your portfolio mix. Work on that and invest for the long term.
Resolution: I will invest an extra USD/Rs/Euro xx per month this year in mutual funds/stocks/bonds/fixed deposits/annuities etc.
6. Build an Emergency Response for your Finances: It’s an uncertain world out there. Protect yourself and your dear ones by buying life insurance, health insurance, household goods insurance .Keep an emergency fund equal to 6 months expenses in a safe investment like a bank account or a liquid mutual fund.
Resolution: I will evaluate my insurance needs and buy term life insurance, get a health cover for the entire family and insure my vehicle/household goods by March 31, 2015. I will create an emergency fund of USD/Rs/Euro xy equal to 6 months of my expenses and keep increasing it every year as my expenses increase.
Pick and choose resolutions that suit your situation or create your own list, but DO it. It will have a substantial impact on your financial wellbeing and pay rich dividends to you through your life.
Do share your thoughts, stories and successes with us as we embark on this journey. Your chances of success are already high if you have read this note. All the best for a very Happy, Prosperous and Successful 2015!
Ajay Bagga
Former Chairman, Financial Planning Standards Board of India
Note- The research quoted is from the Fidelity Investments USA : 6th Annual New Year Financial Resolutions Study.
