Time to Reflect on the Upcoming Year - Our Top 5 Financial New Year’s Resolutions
Author: Nick Prigitano
There is something about fresh starts and new beginnings that inspire action. In The New York Times bestselling book When – The Scientific Secrets of Perfect Timing, author Daniel Pink explores the motivational effects of beginnings (among many other fascinating studies about the importance of timing). But you don’t have to comb through pages of research reports to inherently know that there is something special about the start of a new year.
Setting New Year’s resolutions is a common practice for millions of Americans. Although we all know the stats about how frequently we fail to live up to them, it doesn’t mean we shouldn’t try. If we don’t set goals, then there is a 100% chance we won’t meet them. With that in mind, we have some typical, and not so typical, financial New Year’s resolutions to consider adding to your list for 2022.
Save More, Spend Intentionally
A nearly universal goal for working Americans is to save more money. As financial planners, we strongly agree with this sentiment. In fact, a 2020 survey reported that one-fourth of Americans don’t have any retirement savings. Zero. Hopefully, you’re not in that group, but even if you are, there’s nothing you can do about the past. You can only make improvements for the future. The start of the year is a perfect time to reflect and decide to take initiative of your financial life.
One of the first pillars of any sound financial plan is to establish an emergency fund, if you don’t have one already. The common industry rule of thumb is to have three to six months’ worth of living expenses saved up in case of an emergency. This generally should be the starting place of most savings plans because, if and when an emergency does arise, that setback won’t send you back to square one.
Once you have an emergency fund established, one of the next big items to review is your retirement savings. The easiest place for many people to save is in their workplace retirement account, such as a 401(k) or 403(b). These are set up by your employer, and many even offer incentives to encourage employees to contribute to the plans. Many plans will offer a matching contribution where the employer adds a certain amount to your retirement account up to a percentage of your own contribution. You should almost always contribute at least up to the match, because it’s essentially “free” money from your employer.
Beyond the match, it usually makes sense to contribute more if you can. In 2022, 401(k) account contributions increased to $20,500 for those under age 50 and up to $27,000 for people who will be 50 or older by the end of the year. While not everyone is able to max out their contributions, contributing more than you did in the previous year is a good goal.
Many 401(k) plans offer both a regular and Roth option for your contributions. A regular 401(k) gives you a tax deduction today, but you will need to pay taxes when you withdraw money later. With a Roth, you don’t get a tax deduction now, but the money will grow tax-free going forward. Which one it makes more sense to contribute to will depend on your current tax bracket compared with an estimate of your future tax bracket.
Make a Spending Plan
One of the dirtiest words to many individuals is “budget.” Just reading the word is enough to make many shudder. The connotation of a budget is living in a box, set to certain limits, and surviving on a rigid predetermined existence – and no one wants to do that. We all need to spend money so we can buy the things we need to survive, and even allow ourselves certain luxuries. Instead of forcing yourself to create an ugly budget this coming year, we’d like to encourage you to create a well-thought-out spending plan that aligns with your goals and values.
One of the biggest issues we find for most people’s spending is that it’s on autopilot. There is no thought to where their money is going and why. Often when people review their spending and compare it with what they actually value, the two lists don’t align.
It’s not for us to say what you should spend your money on; that’s for you to decide. Whether it’s travel, dining, gadgets, gifts, charity, a nice car, a big home – you name it – none of these are necessarily wrong answers. Where spending goes awry is when your money is being spent on things you don’t truly value.
I, for instance, love board games. When I say board games, I mean BOARD GAMES. I’m not talking about Monopoly or Scrabble. I’m talking about strategy-inducing deck builders like Dominion (and its many expansions). Formulating complex military maneuvers in A Game of Thrones: The Board Game, which, I might add, came out before the hit TV show. Simulating the tensions of the Cold War in Twilight Struggle. Or even working cooperatively with my friends to thwart foreign invaders in Spirit Island.
I adore board games because I love the feeling of opening a new box, sifting through all the tokens, mats, cards and figurines, and wondering what they all do. I love reading the rules and thinking about how different parts of the game interact with each other, and formulating strategies of how to best my opponents. I especially love sitting down with my friends and family to try out those strategies and relish in sweet, sweet victory – or mourn in catastrophic defeat – and then conjure up new strategies to try out next time. Just being together with friends and family enjoying a thought-provoking activity is something I enjoy most in this world.
That may not resonate with you, and that’s OK. In fact, that’s the point! The purpose is to find things that are important to you and direct your resources there. The moral of the story is not to NOT spend money, but to spend it intentionally. The role of a financial planner is not to judge but to help you reach your goals. (And who am I to judge? I love board games, for Pete’s sake!) But some of the biggest spending issues arise when you tell us your goal is to travel but you spend all your disposable income on fancy cars, big houses and dining out.
This new year, we strongly encourage you to make a resolution to make your spending intentional and create a plan that aligns with your goals, your values and what you want out of life.
Finally Get to the Estate Planning Attorney
Death, disability, incapacity . . . all uplifting topics to think about on the bright dawn of a fresh new year. Of course, no one ever daydreams about their ultimate demise, but one of the most critical parts of a complete financial plan is having updated estate documents. Since it’s such a difficult topic to contemplate, it’s usually one of the first to get pushed to the back burner. But not this year - not in 2022. If you need your estate documents updated, or need to create them for the first time, make it a resolution to get to the attorney this year.
Although it’s not fun talking about estate planning, it would be even worse leaving your loved ones to handle your affairs without any guidance or deal with the hassle of the courts. Every complete estate plan should consist of a few standard documents to ensure you’re covering all your bases.
One of the most basic estate planning documents is a will. This document tells the court who you want to inherit your assets after your passing. The drawback with a will, and why you may want to consider a trust for some assets, is that anything that goes through the will also needs to go through probate. Regardless, this is a cornerstone of estate planning documents and pretty much everyone should have one.
Another critical piece of information found in a will is whom you would like to appoint as guardians for any minor children. If these are not spelled out in the will, it is up to the courts to decide who will be taking care of your kids, which no one really wants.
Power of Attorney (POA) for Finances
Another key piece of a complete estate plan is a POA for finances. This is a very powerful document that allows someone to act on financial matters as if they were you. Since it is such a strong document, it’s imperative to think carefully about whom you would like to appoint.
The purpose of this document is to allow someone to step into your shoes, financially at least, if you are not able to. This primarily comes up in the case of incapacity. Even if you’re young and healthy, you are not immune to a catastrophic event, such as being involved in a car accident, that may leave you indisposed. This document would allow someone to access your accounts and money to help pay your bills and keep the financial matters of your life moving while you’re unable to. This document, however, does not permit your “agent” to decide on any medical matters. You need a separate document for that.
POA for Healthcare
Similar to a POA for financial matters, a POA for healthcare allows someone to make medical decisions for you if you are unable to make them yourself. The person(s) you name on this document do not need to match the ones on your financial POA, and they often don’t.
As in other situations where no one is appointed in advance, if you cannot make medical decisions for yourself, it is up to the courts to appoint someone for you. This is time-consuming and challenging, and they may appoint someone who wouldn’t have been your first choice for these matters. For these reasons, it’s critical to have a POA for healthcare established in advance.
The last document we’ll discuss today is a revocable trust. This document isn’t for everyone, but it can be an excellent estate planning tool for many individuals. The key aspect of a revocable trust is that you still control everything inside the trust. It operates as if it were you, because you’re the owner. You can change the terms at any time or cancel the trust altogether. The only time the terms become irrevocable is upon your passing.
An enormous benefit of a revocable trust is that, unlike a will, it avoids probate. This applies only to things that are held in the trust. These can be things such as investment accounts, bank accounts and even property such as your home and vehicle. Allowing your heirs to settle your estate without having to go through the courts makes the process less costly and often, more importantly, less difficult for those left after you’re gone.
An important thing to keep in mind is that retirement accounts, such as an IRA or a 401(k), cannot be held in a trust. You have to be the direct owner of those accounts. You can make your trust the beneficiary, but that comes with its own complications that go beyond the scope of this post. The best thing to do with these accounts is to make sure your beneficiaries are up to date, which we’ll discuss next.
Don’t Forget Your Beneficiaries
Beyond having the appropriate estate documents in place, it’s imperative to have the right beneficiaries listed on your accounts. Beneficiary designations take precedence over what is written in your will and, like a trust, also avoid probate. We can’t tell you how many times we’ve seen incorrect beneficiary designations on client accounts (such as an ex-spouse!), so it’s important to review these periodically.
Beneficiaries can be added to many accounts, such as investment accounts, retirement accounts, life insurance and bank accounts. Ensuring these are all correct and up to date is a crucial piece of a complete estate plan.
Review Your Life Insurance
A similar topic to reviewing your estate plan is reviewing your life insurance. Because this also involves dealing with one’s own passing, it’s not surprising that this is another common task that gets shuffled aside during the year. But like having a complete estate plan, having adequate life insurance, especially if you have minor children, is imperative.
Life insurance is one of those things that you hope to never use but can relieve an enormous amount of financial stress from your loved ones if you do. The first step is to determine how much life insurance you might need. This includes considering a variety of questions, such as: Do you have a mortgage? How much of your income is someone else relying on? Do you have any minor children? Do you have other outstanding debts? Is there a possibility you may not be eligible for coverage in the future? How long may you need coverage for? Working with a qualified financial planner or life insurance agent can help you determine the amount you may need.
Once you know how much coverage you’re looking for, you need to decide what kind of coverage to get. We generally don’t include any life insurance received through work in our calculations because there is always a possibility that you may get laid off or voluntarily leave your job, creating an insurance gap. While you are generally extended the option to continue the insurance in these situations, it is usually significantly more expensive because of the type of group policy it is, compared with buying a policy on the open market.
The type of insurance we typically recommend is term life insurance. This is because most people don’t have a life insurance need that lasts their entire lives. Many needs for life insurance, such as a mortgage, minor children or income replacement, diminish over time. Term insurance works best in these situations because it is much less expensive than permanent (whole) life insurance and you can maintain the coverage for only the necessary time period.
Focus on Your Fitness
Beyond financial resolutions, another one of the most popular is improving one’s health. As financial planners, we couldn’t agree with this more. Not only does improving your health make you feel better, help you live longer and give you more energy, but it can also have an enormous impact on your finances.
We have all heard how high healthcare costs are in the United States. People who are healthy are less likely to need to see a doctor or take certain medications, possibly saving thousands of dollars over a lifetime. They are also less likely to miss work due to an illness, which can improve overall earnings. There are a plethora of benefits to living a healthy lifestyle, many of which are financial.
What does a healthy lifestyle entail? I’ll leave the exact details to the fitness gurus, but an overall healthy lifestyle will include exercise, a balanced diet and, maybe most importantly, quality sleep. In The New York Times bestselling book Why We Sleep, author Matthew Walker makes a compelling case for the vital importance of sleep for not only our productivity but, especially, our health. Making a resolution to get more sleep will likely help you get more done, and your body will thank you for it.
As financial planners, we are focused on helping our clients achieve their goals. Many common goals include traveling more, spending more quality time with family and grandchildren, or just relaxing in their golden years. There are two parts to satisfying that equation. The first is achieving these goals financially. The second is achieving them physically. Health and finances are inextricably intertwined. You can’t enjoy the things you want to do if you’re hindered by health issues. We would strongly encourage you to make a resolution to improve your health because it will almost certainly assist your finances as well.
Find a Hobby, or Something Like It
As much as we all gripe about work, it provides one of the best places to find purpose and meaning in our lives. Whether it is contributing to a valuable good or service or just for the social aspect, work can have a positive impact on our social and emotional well-being. An issue we see with many people after retirement is that without structure to their day, or the social connections at work, they find themselves lonely and aimless. In these cases, the golden years aren’t always so golden.
As in nearly everything we do, the best start is to have a plan in place. Will plans change? Of course. But having a road map to look toward can be incredibly helpful when avoiding common pitfalls. That’s why we strongly advocate our clients have a hobby (may I recommend board games?); a second, more enjoyable career; or some idea of service to look forward to after retirement. This can prevent the feeling of aimlessness once you’ve finished “punching the clock” for good.
The best time to figure this out is before retirement; it is wise to test the water a little before going all in. Many times, we’ve seen clients have ideas for what they want to do in retirement only to find after they’ve actually retired that they don’t enjoy what they planned to do as much as they’d hoped
Obviously, this may not yet apply to anyone with children still living at home. Understandably, your “hobby” is likely driving them to soccer practice, helping with homework or trying to keep your teenagers out of trouble. But if you are in a situation where you can spend some time thinking about what life after work looks like, we would encourage you to start trying out some hobbies, researching a new career or looking at areas of service in the coming year.
New Year’s resolutions are a great idea for improving yourself and your financial situation in the coming year. Having clear goals to reach helps us clarify what we want out of life and can help us attain what we want to achieve.
Financial goals are a common area that many people focus on with their resolutions. With that said, it’s important to remember that money is just a tool to help us achieve our goals. There is much more that goes into your financial plan than just the dollars and cents. It’s important to get the numbers in order but without losing sight of what really matters to you and what you want to achieve.
Nick Prigitano, CFP® is an advisor at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisor.