It's a new year and a fresh start! It's a great time to reflect on what changes you are going to make in the coming year. If finances are one of the things you need to get in order, here are 10 simple things to do this year to jump start your financial outlook.
1. Increase Your Savings Rate
Don't stop at the match! Most people will save in their employer plans (401K, 403b...) and only put up to the match. They think, I need to contribute 5% and I will receive 5% from my employer, therefore, I am saving 10%! In reality everyone should be contributing at least 10% as their own contribution.
This is just a start, you should be increasing these contributions by 1% every year. The max contribution you can put into your 401K for 2019 is $19,000 of your own contribution ($25,000 if you are over 50.) Your employer match is in addition to this amount. Maxing out should be your goal. Get a plan in place and work up to it.
If you are already maxing out your 401K good for you! Keep it up! If you are a high income earner and 10%- 15% is over the max amount you can put in your employer sponsored plan. You will need to find a place to put money else where. You can open an Individual or Joint Account at a brokerage like Fidelity or with a Certified Financial Planner and build out a portfolio to contribute money over and above your employer plan.
2. Start a Roth IRA
Roth IRAs offer you tax free benefits after age 59 1/2. The money you contribute to the Roth IRA is after tax money. If the money is invested, it will grow tax free. When you take distributions after 59 1/2 it will be fully tax free.
Roth IRA are a fairly new concept. They first started in 1997, so Millennials and Gen-Xers will be the first generation with 30+ years of Roth assets in their portfolios. This is a great way to generate tax free income in retirement. There are a couple of things to keep in mind. The max you can put into a Roth IRA for 2019 is $6000 ($7000 if you are over 50). There are also income limits for Roth IRAs. If you make more than $193,000 married filing jointly in 2019, you can't contribute to a Roth IRA.
Right now if you are under the income limits and presumably in a lower tax bracket, this is the best time to fund as much as you can in a Roth IRA. For higher income earners, if your company offers a Roth 401K option you will be able to have the same tax free benefits at a higher savings rate ($19,000) and without income limits.
3. Put Together a Debt Reduction Plan
Debt reduction is important. It can be the number one killer to any financial plan. Whether it's student loan debt or credit cards. It happens. Make this the year to finally tackle the debt that you have and stop accumulating new unnecessary debt.
It may seem daunting, but putting a plan in place is the first step. My recommendation would be to know the interest rates that you are paying and start with the lowest balance first. If you start with the lowest balance this is an achievable goal. Once you pay of that smallest balance it will give you incentive to keep going... pay it off by paying more than the minimum. Once that loan is paid off, put what you where paying for the first loan plus the minimum until that is paid off. Move on to the next and so forth. This works well with credit cards and private student loans. You want to pay any private student loans first before federal loans. Dave Ramsey has a great step by step explanation for this. https://www.daveramsey.com/blog/how-the-debt-snowball-method-works
You can also start with the highest interest rate first, but that might carry a higher balance and take you longer to pay off. This can be discouraging and paying off smaller balances can give you the encouragement to keep going.
4. Know Where Your Money is Going
Once you decide on a plan to tackle debt, the easiest way to start putting it into motion is to know where your money is going. Starting a budget is daunting (but important!) The easiest way to start is to make a list of all of your expenses. In the age of subscriptions it is easy to forget about automatic payments. If you consciously write down where you money is going, it's easy to find places to cut certain unnecessary spending.
Mint.com is a great tool to help you track your spending. It links all of your accounts and tracks where you are spending. It will even break it out for you into categories. You can then build your budget from there and set reminders for yourself when you are spending too much in one category.
5. Finally Start an Emergency Fund
Start putting money away in a savings account. This should not be invested in the markets. It needs to be fully liquid and accessible for emergencies only (unemployment, unexpected medical cost...)
The rule of thumb for an emergency fund is to have at least 3-6 months of non-discretionary expenses set aside. Add up every expense that you have to pay a month. Take that amount times 6 months and put that amount into a savings account that you do not touch or use. This is the important part...You can't touch this for anything but emergencies. You can have another savings account for other things such as travel and bigger purchases but your emergency fund should be totally separate from any other savings or checking account.
If you have a savings account for emergency expenses, this will also reduce what goes on a credit card and added debt should such an emergency arise.
6. Draft a Will
This is a simple estate planning document. A Will is especially important if you have children. You will name the guardian for your children in your Will should something happen to you and your spouse or another parent/guardian.
A named beneficiary on a life insurance policy, 401K... will supersede a Will. I like to think a Will as a place to name a beneficiary for tangible assets (house, car, jewelry...). Monetary assets should be left via beneficiary designation.
You can have a lawyer draft a Will for you. If you are looking for a more inexpensive route you can go to places like http://www.legalzoom.com to draft a will for much less than a lawyer would charge. If you are young and don't have a lot of assets, but have children and just want to make sure that they will have a guardian, Legal Zoom works great.
7. Life Insurance
Do you need life insurance? If you are married and have children the answer is yes. If you are single and you carry a lot of student loan debt, you might want to consider a life insurance policy.
A good rule of thumb would be 5-10 X your salary. If you are working, most employers will offer around $50,000 of life insurance for a minimal or no cost. You can usually get multiples of your salary for a reduced cost as well. This would be the first place to look if you are considering adding coverage. One thing to be aware of with group polices is many of them are non-portable. Meaning, you can't take them with you if you leave your job. If you are not planning on staying awhile with you current employer it may be more beneficial to secure a private policy.
If group coverage doesn't offer what you are looking for, private policies have more choices for coverage. You can choose from a term policy, this will insure you for a certain period of time (10,20,30 years...). A term policy is a lower cost way to get a larger amount of life insurance in place. A Whole Life Policy, Universal Life Policy is permanent insurance that will last for the rest of your life. These permanent policies are more expensive, but they offer more features than term polices.
8. Diversify Your Investments
How you are allocated within your 401K and other investment accounts is important. You don't want to have all of your eggs in one investment basket.
On that note, once you are allocated correctly to your risk tolerance and risk capacity, don't get emotional.
Don’t make investment decisions based on emotions. The number one mistake that you can make is getting emotional and jumping in and out of the markets. It’s easy to feel confident in a rising market and scared in a falling market. Remember you are investing for the long term
9. Look Into An HSA and FSA Options Through Your Employer
HSA and FSA for medical expenses are a great tax savings vehicle for health care expenses. HSAs are typically used with high deductible health plans and medical FSAs are used with more traditional health plans.
There is also FSA for dependent care. You will contribute a portion of your paycheck on a pre-tax basis to either your HSA or FSA and your employer may even provide a match. Then you are able to spend the money on qualified medical expenses or child care with the FSA. Being able to pay for these expenses on a pre-tax basis can save you cash.
10. Know your Credit Score
Get friendly with your credit score. It's important to check your credit score and to know where you stand. A good credit score can help you get better interest rates on loans.
If you carry credit cards and pay them off regularly this will help your credit score. Some credit does help, you just want to make sure you are not carrying balances. Websites like Credit Karma can monitor your credit for free.