Will you make financial resolutions for the New Year?
If so, you’re not alone. According to a study done by Fidelity Investments, financial resolutions are the most popular kind of New Year self-improvement. Not only that, but they’re also the most successful, with 29% of people surveyed reaching their financial goals and 74% getting halfway there. Compared to the 12% success rate for resolutions concerning health and fitness, planning to get your finances in order seems like the way to go in 2016! Ask yourself these 6 money questions to help you prepare for the New Year.
- What are your financial goals this year?
A new year often means new goals and milestones in your life, and your financial plan needs to change to keep up with those.
Maybe last year you were saving for a trip abroad, but this year you are saving for a down payment on a house. Or maybe you’re edging closer to retirement and need to start saving more aggressively.
Don’t be vague when identifying these goals. A concrete milestone, such as “I want to add $6,000 to my emergency fund” is going to keep you motivated a lot longer than a vague one like, “I want to save money.” Once you know what your financial goals are, you’ll be able to come up with a spending and budgeting plan for how to reach them.
- Where did you slip last year?
The New Year is an excellent time to take stock of what did and didn’t work in the past year — that includes where you didn’t quite follow your budget. Did you eat out more than you should have in 2015? Not save as much for retirement as you wanted? Impulse shop too frequently?
You can’t improve in 2016 until you know where you went wrong the year before. Take some time to look at your spending from the last twelve months and identify the area where you slipped up. The make a plan for how to avoid those mistakes this year.
- What are your mandatory expenses?
Once you know your goals, priorities, and weak spots, it’s time to begin setting up your budget. Start by identifying the living expenses that you must pay every month. These will include your rent or mortgage, insurance bills, utilities, and any debt payments. Budget for these expenses first, subtracting their total from your monthly income after taxes. Whatever is leftover is what you have available for variable expenses.
- How much can you save each month?
Once you’ve determined how much to set aside for mandatory expenses, it’s time to look at savings. Savings can include long-term goals, like retirement, or short term goals, like a vacation. Identify everything that you want to save for this year, then order them in terms of urgency.
Some goals, like retirement, you should save for every month. Other things, like travel or large expenses, can be saved for one at a time. Once you’ve met one savings goal, you can move on to the next one.
- What are your spending triggers?
A lot of financial management is about cutting spending — reducing your insurance bill, avoiding credit card interest, eating out less. But all the small cuts in the world won’t help if you don’t know your spending triggers.
Spending triggers are those moments or circumstances that make you pull out your credit card and break the rules of your budget, even when you have the best of intentions. If you want to cut your spending, take some time to identify these triggers and come up with a plan to eliminate them.
- Where does your budget have wiggle room?
Managing your finances is awesome, and cutting down your spending to save more is a great goal. But if you are on a strict budget all the time, with no room for any lapses or fun purchases, you risk getting “budget burnout” and slipping back into old, bad habits.
To avoid that, identify the places where you can cut yourself some slack. Maybe you’re giving up eating out but can still treat yourself to a latte once or twice a week. Maybe you’re giving up cable, but you and your roommate can split a Netflix subscription. Allow yourself a few inexpensive extras and sticking to your larger financial goals will feel much less stifling.
Finally, wiggle room also means planning for the unexpected. It may seem smart to put every extra penny into savings and retirement, but what happens when your car breaks down and you don’t have any money for the repair? Leave a little wiggle room for surprise expenses, and you won’t just start a budget, you’ll stick with it.
The beginning of a new year is the perfect time to get your finances in order. Be honest and realistic with yourself as you put together your plan for 2016, and you’ll find yourself on your way to sustainable financial success.