Improving our finances is normally among the top three New Year’s resolutions for Americans, but most fail because they do not know how to get started; they do not have a template for success. Knowing where to begin is the first step toward making your improved financial situation a reality. A good place to start is to see how your financial life aligns with the Five Fundamentals of Fiscal Fitness. A piecemeal approach to this resolution is the key to achieving sustainable results. Choose one to three actions from the Five Fundamentals of Fiscal Fitness to implement this year, and you will be more likely to realize success.
Five Fundamentals of Fiscal Fitness
1. Pay Yourself First - Savings and Retirement
- Maximize your contributions to your employer sponsored retirement plan; if you can’t max yet, increase your contribution by 1% this year, and the next, and the next until you are saving 10-15% of gross income for retirement.
- Put your savings for other goals on autopilot – have your employer automatically deposit 5-10% of your paycheck into your money market account.
- Do not increase your standard of living as income increases: have pay increases and/or bonuses received throughout the year deposited into your savings account.
2. Have Sufficient Liquidity
- Begin saving toward a goal of having at least 6, 9 or 12 months of monthly household expenses set aside for emergencies (i.e. larger unexpected expenses). Put monthly savings on autopilot as above.
- Take into account your individual situation and individual factors in determining an appropriate liquidity amount.
- Include contributions to your savings in your monthly spending plan to help build your cash reserves.
- Review spending habits and redirect any discretionary spending you can to building emergency cash reserves.
3. Pay Off All Credit Cards and Consumer Debt
- Create a list of your consumer debts noting the remaining balance and the interest rate. Decide whether you will pay off debts by smallest balancefirst or highest interest ratefirst. Pay the minimum required payment on all debts except the debt ranked #1. The debt ranked #1 receives extra money until paid off. Then turn your focus to the #2 debt.
- Decrease your use of credit cards by leaving the cards at home when shopping and taking only the amount of cash you plan to spend.
- Delete credit card numbers from your account on online shopping sites you have used; when you have to enter the number, ask yourself if this is a necessary purchase that fits within your spending plan.
4. Own the Right-Sized Home
- Determine the current value of your home and compare to your annual earnings. Your home should be worth 2 to 2 ½ times your annual income. Are you over-housed with housing costs taking more than their fair share of expenses?
- Assess the amount of equity in your home. Maintain a mortgage of 50-80% of your home’s value to maximize tax benefits. Are you maximizing the tax benefits?
- Compare your mortgage interest rate to current interest rates. Is it time to refinance to a lower interest rate?
- Stop paying extra on your mortgage and redirect that same amount to retirement savings or emergency fund savings.
5. Invest in Your Career
- Update your resume or curriculum vitae.
- Determine the next company position you are interested in and begin obtaining the necessary credentials or skills that it requires.
- How does your pay compare to the market? What steps have you taken to improve your marketability?
- Evaluate hobbies and interests that spark excitement for you outside of your current work. Are there needs of others that you can fill with that interest? Are the needs great enough to start a business?
Dr. Martin Luther King, Jr. said, “Faith is taking the first step even when you don't see the whole staircase.” Choose several doable items from the actions above and set a goal for progress and not perfection with your finances in 2016. While the basics of the Five Fundamentals of Financial Fitness are not overly complex, the key is working with an advisor to help you prioritize the fundamentals, help coach you on the fundamentals, and help to implement the fundamentals. After the fundamentals are established, more advanced planning can be targeted.
Authored by fellow Alliance of Comprehensive Planner (ACP) member, Cordi Powell, CFP, EA. Alliance of Comprehensive Planners