A Simple 3 Step Strategy to Actually Pursue Your 2017 Financial Resolutions

A Simple 3 Step Strategy to Actually Pursue Your 2017 Financial Resolutions

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Here we go again, another New Year.  Another list of hopeful goals alongside a list of failed resolutions of yesteryear.  We blissfully ignore our previously failed attempts and get ready to do it all over again.  For many of us, resolutions have become a carrot on a string or the end of the rainbow.  It’s right there while simultaneously being perpetually out of reach.  For many of us one of these ethereal resolutions is becoming more financially fit.  It seems so simple but our busy (and expensive) lives seem to always get in the way.  Let’s change that in 2017.  Let’s make this the year you save more.

 

To actually make a change this year, let’s rethink your strategy from the beginning.  Let’s talk budgets.  My guess would be that you have tried sticking to a budget more than once without success.  The volatility of life makes expense budgeting one of the most difficult exercises in discipline.  For those of you with a working budget, I am not recommending throwing it out the window.  Instead, I am simply recommending coming at the problem from another angle.  Instead of expense budgeting, for 2017, try a savings budget .

 

A savings budget is simply the opposite of an expense budget.  Think of an expense budget as an envelope full of cash.  As the month goes on you pull from that envelope to pay for a category entertainment until the envelope runs out.  A savings budget is more like a lock box that starts empty and gets filled through the month to a set goal.  Once the lock box is full, everything else you have left over can be spent.  By setting a realistic goal and then automating the savings, achieving your saving goals can become reality.

Here are the 3 Steps to Create your Savings Budget:

Calculate

Use 2016 as your test case.  You will need to find out how much you made last year and how much you saved.  If you get a paycheck you can usually find this easily on your last paystub.  Add up your Gross Income  (that is before taxes are taken out) from all sources.  Then add up what you saved to all your different accounts.  This can be a little trickier but use the following list to help identify places you saved.  Only include things that are automated, otherwise you can be tricking yourself.

2016 Gross Income $______________(A)

 

Your 401(k) Contributions $________

+401(k) Matching Contributions $__________  (yes, this counts)

+Roth IRA Contributions $__________

+Emergency/Savings Account $___________

+Additional Payments to Mortgage $__________

+529 Accounts $__________

+Other $__________

=Total Saved $______________(B)

 

Then divide B by A to get your savings rate in 2016.  For example, if you made $100,000 and saved $10,000 then your savings rate is 10%

 

B____________÷ A ____________ = ____________%

Save More

Now increase your rate for 2017.  I recommend increasing by 5%.  Ideally you should be saving between 10-20% of your income every year.  That has historically allowed people to pursue financial freedom at normal retirement age (65).  If 5% is too tough, think about increasing your savings rate by your most recent raise.  Maybe you got a 3% raise last year or are expecting one.  Instead of spending that 3%, commit to saving it.

Automate

The numbers in this exercise do not count unless the savings is automated.  This helps ensure you meet that savings goal.  Automated savings include, contributing a percentage of your paycheck to your 401(k), having your investment account automatically pull a certain amount of dollars every month, or setting up auto-pay on your mortgage.  Modify these amounts to hit your new savings goal and voila, by the end of 2017 you will hit your goal.

Practice this exercise every year of seeing how much you saved and raising the bar for the upcoming year.  Soon enough you will look back and be amazed at what you have accomplished.  Our practice helps calculate these numbers for our clients and works together to put the automation in place.  If you’ve never set a savings budget and need help, call us to get started.  There is no time like New Year’s to start a new goal.