If you make a New Year’s resolution, and you don’t follow through on it, what are the consequences? It all depends. If you vow to learn French, but you never get past "Oui, mademoiselle," your life will probably go on pretty much as before (unless, of course, you’re now living in France). But if you make some financial resolutions, and you abandon them, you could fall short of your long-term goals - such as a comfortable retirement.
Consequently, you’ll want to set reasonable and attainable financial resolutions - and then discipline yourself to achieve them. What sort of resolutions might you make?
Consider the following:
Boost your 401(k) contributions this year - and every year. If your employer offers a 401(k) or similar retirement plan - such as a 403(b) or 457(b) - take full advantage of it. Your earnings have the potential to grow on a tax-deferred basis, and, because you typically make pre-tax contributions, the more you invest, the lower your annual taxable income. Furthermore, you may have a dozen or more investment options within your plan, so you can tailor your choices to reflect your individual risk tolerance, goals and time horizon. If your salary goes up every year, increase your 401(k) contributions at the same time. Since the money will automatically be deducted from your paycheck, you shouldn’t find it hard to keep this financial "resolution."
Contribute the maximum amount to your IRA. Your traditional or Roth IRA can be a key part of your retirement savings. A traditional IRA can potentially grow tax deferred, while a Roth IRA’s earnings have the potential to grow tax-free, provided you don’t take withdrawals until you reach 59-1/2 and you’ve had your account at least five years. Unfortunately, many people don’t fully fund their IRAs each year because they’re intimidated by the contribution limits ($5,000 per year, or $6,000 if you’re over 50). But there’s no need to fund your IRA all at once; you can do it incrementally. Why not write out a check to your IRA each time you get paid, or, better yet, have the money automatically sent from your checking account? Again, it will be easier to keep this resolution if you don’t have to work at it.
Build an emergency fund. This resolution may take a bit more effort, but it’s worth it. If you can put away six to 12 months’ worth of living expenses in a liquid account, and only use the money for emergencies - car repairs, unexpected doctors’ bills, etc. - you may be able to avoid dipping into your investments to pay for these costs. And the less you tap into your investments, the better.
Cut your debts. Here’s another resolution that sounds simple, but can be difficult to achieve. Yet, every dollar that doesn’t have to go for a debt payment can be invested for your future. In 2008, look for ways to cut your costs, and strive to live within your means.
See a professional. If you’ve never worked with a financial advisor, make 2008 the year to start. A qualified financial advisor can objectively evaluate your situation and suggest appropriate financial strategies for helping you achieve your long-term objectives.
If you can follow all these resolutions in 2008, you can help position yourself for financial success - for many New Years to come.
Evans is a financial advisor with Edward Jones in Richmond Hill.