5 New Year’s Financial Resolutions

In this show, Mike and Amy discuss New Years’ Resolutions and five of the most common financial resolutions people set out to achieve in the New Year.  We hit the highpoints of the following common financial resolutions:

1. Save More (3:28)
2. Reduce Debt (5:05)
3. Invest More (7:17)
4. Make a Budget/ Stick to a Budget (9:11)
5. Save for College (14:02)

Links:

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Transcript

Mike: Happy New Year’s Amy.

Amy: Hey Mike. Happy New year. Did you do anything exciting for the holiday?

Mike: No, pretty low key New Year’s we celebrated the East Coast New Year’s, even though we’re in Central time zone and I was in bed before midnight out here. So nothing really exciting.

Amy: Yeah, that sounds like what I do. Only I don’t even wait until midnight. East Coast time. I just go ahead to bed. I’ll see you on New Year’s when I wake up in the morning. I just can’t stay up till midnight.

Mike: I know it’s crazy. I think about how that wasn’t always the case. And it used to be out much later than that. Not now. It’ll be here tomorrow. So. Good deal. So do you. You come up with any big resolutions for the year?

Amy: I always set a goal for how many books to read in a year, so of course I’ll set that goal and then just a few health goals that I try to stick through, keep them pretty manageable. I’m not one of the folks that you know. Buys a gym membership and then I forget about it in a month or two more. How about you?

Mike: About the same, nothing really big this year. Yeah, you talked about the gym. I hate the early in the year, January, February. It’s just packed and you know you go in and you’re like, alright, just hurry up and quit your resolution and. You know, by March you’re back to a normal steady state. Where you get on the machine, do you want to or the equipment and it’s it’s it’s, it’s funny to say it actually play out. But yeah the first couple months of the New Year I’m always like ohh, I don’t really want to go today.

Amy: Yeah. And I mean, there’s, I’m sure that other people are in the exact same boat, whether they’re setting small resolutions or big resolutions. But you know, today one of the things that we’re going to talk about is the financial resolutions that people often set. So the five most common New Year’s financial resolutions and hopefully, you know, people can stick with these. So Mike, what, what do you think is the number one Financial New Year’s resolution is for people.

(3:28) Mike: I think one and two are pretty close, but I’m going to say I think it’s just to save more folks. You know they have goals. Maybe they have to build up their emergency fund. Maybe it’s to buy a new car or save for a down payment on their house and you know, so that’s pretty common of folks saying, well, I, you know, spent too much last year. I gotta, you know, put some away for the future. And you know it’s an important goal. A couple things when I like to think about it is, you know, start small, don’t go out and say if you don’t have a savings habit, don’t suddenly say I’m going to save 25% of my income now unless you got a huge raise. That just came in and you’ve got extra money, but start small. One of my old bosses used to say start small and scale fast, but look for those opportunities to increase it over time. And then the other piece is just where you’re saving interest rates have come up quite a bit and so you can get real interest on your money that you’re saving now. But the problem is a lot of the bigger banks are still paying very low rates, so. Looking at, you know, high yield savings accounts at online banks is a great way to kind of boost that savings and actually get paid for, you know having your bank store store your money there?

(5:05) Amy: Yeah, that is a big one and like you said, it’s important to start small. You know, we talked about people in the gym where, you know they haven’t been going to the gym at all and then they decide they’re going to join the gym and they start out going, but it tails off and actually it would be better if. They just decided that they were going to do something small in preparation for starting a gym habit and then slowly scaled into the gym habit so that it would last longer. So it’s the same sort of thing with these financial resolutions. So that’s a great point and I’m going to guess that you know the number two that you said, you know one and two are close #2 is, you know, reducing debt. So these might sound like they’re in conflict. A lot of people have the same goal. And later on, we can talk about how you balance the two of these things. But you know the average American is carrying something like, you know, $22,000 worth of debt. And interest rates are up. While that can help you on the. Saving more sides. It’s working against you on the paying down debt side. So I think that a lot of the same tenants you talked about saving more also apply. So obviously you want to hit your. Minimum payments every month. You don’t want to be adding late fees and things like that to your balance or. In addition to interest, try to pay a little bit extra each month and if you’ve got extra income that comes in either because of a bonus or a pay increase, you know, throw some, at least some of that money into your reducing debt goal.

(7:17) Mike: Paying down debt is incredibly important, and it, you know, credit card rates are now up to about 20%. So people look at their statement and see what they’re paying every month on that balance that they’re covering. It is very important to get a handle on that and pay that down as much as. As possible. Kind of dovetailing out of both one and two is, you know, people may want to invest more is probably the third biggest New Year’s resolution. They may be thinking long term like retirement or their child’s education. Trying to come up with. OK, well, what do we do? How do we get started? And there’s so many great resources out there. Tons of podcasts, tons of books. I mean, we could, you know, do so many shows just on investing. But the things I’d recommend if you’re just starting out are to do. Do your homework. Take some time, dig in. Learn about it. Or if you, you know, don’t want to learn about it, find somebody, find a good advisor that you can trust that can help you start an investing habit because you know. Prevent the mistakes there are. There are a lot of ways you can go wrong on investing and you sell it all during the pandemic with the meme stocks and people putting a lot of money in. Some people definitely made money, but you know, a lot of people had the heartache of, you know, things are going up. They’re buying them at or near the top, and then things have come crashing back down and you know, a lot of people have now sworn off investing. So do your homework. There’s definitely ways to do it so that you, you know, balance your risk. And if you’re not interested in learning all about it, you know, find somebody that can help you, you know, take the time and do some education for you, but also just help you invest your money.

(9:11) Amy: Yeah. And you know, like you said, these investing sort of still tails into the first two resolutions that people commonly set. But just to draw the distinction between saving more and investing more, you know, you hit it on the head, investing is for a longer term. UM. There’s risk involved, so there’s downside and making sure that you control that risk to the downside is a big deal. So savings is for things that are shorter term. So you need to save more if you don’t have an emergency fund. If you’re saving for a goal that’s inside, you know two to five years, depending on your appetite for. And investing is for things that are outside those time frames and and and doing it in an appropriate way, a cost efficient way. So it’s important to have either a trusted advisor or trusted resource to help you get up to speed on the types of investments, the risks associated with them and. How they might fit or might not fit into your overall financial picture. You know, and you know, so we’ve been through three things already. Save more, pay down debt and invest more. And if you’re trying to kind of balance all of those things because you have financial goals that are important to you that fall into all of those buckets. The 4th one is perhaps. Kind of the tool to help you do those things and that is setting up a budget. So whether you’re a fanatical Excel budget person or using one of the budget apps that are available. Or if you hate budgeting, the truth is that you need to keep track of what you’re spending. So what’s coming in, what’s going out and then deciding for yourself on whether or not you’re satisfied with where your money is going? And if you’re not, then setting behavioral change goals for yourself. So, for example, instead of saying I’m only going to spend $100 on going out to eat this week, if you’re not an Excel person, or if you don’t love the numbers piece of it, you’re not going to track $100 a week. But you could track if you know your family of four. We’re only going out to dinner one time this week, so that’s the behavioral goal. We will only go out to dinner once per week and we’re going to go to a fast casual place versus a full sit down, more expensive place. So, you know, budgeting is kind of what brings all of this together and everybody has a love-hate relationship with budgeting, but in some form it’s something that you have to do.

Mike: Yeah, I’m definitely more on the height side of budgeting I. I think it it’s it’s critically important and you know, I kind of like to think of it, I I do a version of what people call it sometimes refer to as reverse budgeting, where you’re making sure those big things get taken care of first. You know, the savings, the investing, all that gets either sucked directly out of the paycheck. Or it’s automated to go to the accounts it needs to go to and then. You know you spend what’s leftover and you know that just you know that that works for me, that I know that works for some other people versus tracking and saying ohh I can only spend $200.00 on groceries and $100 eating out and those types of things. So there’s a lot of different ways to do it like you said. But it’s important because. You know, unless you’re super happy with how everything’s going in your financial life, you’re saving enough. You’re investing enough and your debts manageable. You know it can. It can make sense to have a budget.

Amy: I just want to point out that, you know, you’re a financial planner and just admitted that you hate budgeting. So you know the key take-away. There are a lot of people who hate it. So you just have to find something that works for you. So you found something that works for you. So anybody who’s listening, who also hates budgeting, you know, take heart that there are people who do this for a living that also hate budgeting.

Mike: Exactly. Exactly.

Amy: So Mike? No, go ahead. I was just going to ask what the 5th sort of most common resolution is.

(14:02) Mike: So I think the big one is, is your kids. So planning for college is a huge expense and if you have kids, this is usually a top goal. You may have the other things all in place and and thinking now of you know maybe there’s a little extra money you went through the budgeting. And you said, hey, I need to, I need to plan for school and and. College costs are crazy. I’ve got a daughter who’s in her senior year in high school, just got accepted to college and, you know, not looking forward to those bills. But, you know, planning ahead. Understanding what the schools are going to, you know, expect you to pay. Saving as much as you can. Early compound interest works if if you start, you know you’re you’re about to have. A new child. Start as soon as you can. It gives you a lot of runway, you know, 1718 years to be putting a little bit of money away every month can go a long way. If you’re, you know, starting the process later, maybe you know you didn’t have the income earlier in your career to be able to save a lot for your kids’ college. Then it’s looking at how you pay for it and how you figure it out. You know, the best schools to go to? What are the schools that offer more financial aid, be it either merit aid through scholarships based on them having certain test scores, or if it’s actual financial need? So they’re they’re. A bunch of different schools have different business models for how they charge, so really getting smart on that as you’ve got high school students and understanding what you can do to pay for college is huge.

Amy: Yeah, and also, you know, having frank discussions with your kids as they grow up, you know each appropriate discussion with them about you know what they really want to do with their future and the most cost effective means for getting through it because there’s plenty of families that, you know just. Let their kids pick whatever school and then the family is, you know, financially stressed because the child picked a very, very expensive school, whereas you know, if you have discussions early on with your kids, set their expectations for. How much you know they’re expected to contribute and put parameters around things that are sustainable for your family, for all the number of kids that you have is another important part of the equation.

Mike: Yeah, that’s critical because you know, when you’re 1718 years old. You don’t really understand the concept of. $300,000, you know, in student loans that you know, some families actually take out and. And so having that discussion, sending them down saying OK. Converting whatever you’re going to take in loans, you know, across the whole family, whether it’s parents or students and saying this is the equivalent of $1500 a month for the next, you know, 1020 years, you know. Double double car payment or you know, even even a small mortgage, you know, depending on where you live. So, it can be crazy if you’re not doing planning on the front end.

Amy: Yeah, yeah, yeah. So we’ve gone through, you know, 5 pretty common financial resolutions as we wrap up this show, you know, heading into the next show, we’re going to talk about. 5 uncommon resolutions, so there might be a few people out there thinking about these things, but we’re going to talk about the five sort of most important things that we see as financial planners that people should be thinking about. So Mike, I’m, I’m looking forward to next week or our next podcast. In a couple of weeks.

Mike: Yeah. That sounds good. Yeah. These, these, these are all good. You know, resolutions. They have kind of the bread and butter, if you will, of you know, financial planning and health. But there are other things that people may not think of that are, you know. Kind of less sexy ones, but are are critically important that folks should be taking into account, even if it’s not a resolution that they should just be thinking about.

Amy: Well, Mike, I look forward to catching up with you again in a couple of weeks.

Mike: Yeah, that sounds great.