The beginning of a new year is a good time to evaluate your finances and take steps to improve your financial situation. Start by reviewing your living expenses and comparing them to your income. Are you living within your means and spending money in areas that are important to you? Look for opportunities to prioritize your spending where you will get the most benefit and joy.
This is also a good time to calculate your net worth to see if it has increased over the previous year and evaluate progress toward your goals. To calculate your net worth, add up the value of all of your assets including real estate, bank accounts, vehicles and investment accounts and subtract all outstanding debts including mortgages, credit card balances, car loans and student loans.
With a better understanding of your net worth and cash flow you are ready to set some financial goals. Start with the low hanging fruit including paying off outstanding credit card balances and establishing an emergency fund. Maintain an emergency fund equal to at least three months of expenses. Once your credit cards are paid off you may want to focus on paying off other high interest debt.
After paying off debt and creating an emergency fund, it’s advisable to get in the habit of saving at least 10% of your income. Saving 20% may be a better goal if you are running behind on saving for retirement.
Take advantage of opportunities to defer taxes by contributing to your company’s 401k. If you are self- employed create a retirement plan or contribute to an IRA. Take advantage of any match that your employer may provide for contributing to your retirement plan. If you are already making retirement contributions, evaluate your ability to increase your contributions. If you have recently turned 50 you may want to increase your contribution to take advantage catch-up provisions that raise the contribution limits for individuals over 50.
As the new year begins you also may want to evaluate your career situation. Saving and investing is just part of the equation, your financial security is largely dependent on career choices. Look for opportunities to enhance your career that may result in a higher salary or improved job satisfaction. It may be time to ask for a raise or a promotion or to explore opportunities in a new field. Consider taking some classes to sharpen your skills for your current job or to prepare you for a new more exciting career.
You may have additional goals such as buying a new home, contributing to your children’s college fund, remodeling your house, or taking a big vacation. Strategically think about your priorities and what will bring you satisfaction. Start the year with intention, identify some impactful financial goals and create a plan. Formulate an action plan with specific steps to help you meet your goals.