As the calendar year winds down, people’s thoughts often turn to January and the habits and goals they want to achieve in the coming 12 months. If you’re thinking about New Year’s Resolutions you’d like to make for the next year, you might want to consider including one or two from our list. The positive effects from improving your financial health will extend well beyond the coming year and could even help you to achieve longer-term goals that may seem out of reach.
1. Look into investing
If you’ve heard the cliche, “You want your money to work for you,” the person who said it was probably talking about investing. An investment is something you buy that returns money to you in the form of interest, dividends, rent, or profit. For example, if you purchase a house that you rent to a family on a monthly basis, that’s a real estate investment. But if you purchase a home for you to live in, that would not be an investment unless you purchased it with the sole purpose of selling it for a profit.
There are many different ways to invest your money:
- ETFs. This stands for Exchange Traded Fund. ETFs are funds that allow investors to purchase an interest in a diverse portfolio of either stocks or bonds. For example, you could invest in an S&P 500 ETF that allows you to own an interest in the entire exchange. This can be lower risk than investing in individual stocks and can help ensure your money grows at the rate of the entire market. ETFS can also be a low-cost way to invest.
- Mutual Funds. Mutual funds are similar to ETFs in that they are diverse portfolios of pooled assets. When you invest in a mutual fund, you buy an interest in the performance of the pooled group of stocks, bonds and other investments. This is also considered a lower risk type of investing.
- Stocks. Investing in individual stocks is often considered an advanced type of investing. The reason for this is: in order to ensure the company and the industry it’s in are inline with your investing strategy and horizon (the timeline within which you plan to use or need the money you’ve invested), you will have to engage in a fair amount of research. You should also monitor news about the company, listen to investor calls and regularly assess whether or not owning stocks in these companies fits with your investment strategy.
- Bonds. Bonds are essentially a loan you’re making to a company or government. The company or government then pays you interest on the loan that corresponds with the likelihood you will get paid back (the lower the interest rate, the lower the risk and vice versa).
- Real Estate. To invest in real estate you will likely need a large lump sum of money up front as a downpayment, then you can apply for a loan for the remainder of the purchase price. Whereas purchasing an asset like stocks or bonds requires very little of you on a daily basis, being a property owner will likely require time and additional capital to keep your investment in working order.
- Alternative investments like Cryptocurrency. Alternative investments like cryptocurrency are assets that usually come with higher risk and offer a higher potential reward. Most financial advisors would caution you not to put all of your savings into alternative investments and instead make them a small part of a well-diversified portfolio.
There are many vehicles you can use to invest your money:
- Brokerage account with a financial institution
If you have money left in your budget at the end of each month, investing it in the market will help your savings grow faster than if you leave it in a savings account. While the average return of the market varies from year-to-year, investors can typically expect an annual return of 8% when accounting for inflation. Compare this to the current average interest rate for savings accounts (0.16%), and you can see invested money “works harder” than that in savings accounts.
2. Set aside money for emergencies
Even if you have a stable job and a partner that also contributes income to the family finances, financial experts suggest having an emergency savings account with between 3 and 6 months worth of expenses in it. If you haven’t started your emergency fund, don’t panic. You don’t need to have the entire 3 to 6 months right now. You just need to start saving what you can.
First, determine what your monthly expenses are (you’ll use them to create your personal budget). To do this, you audit your credit cards and checking account, grouping the withdrawals into like-kind categories like rent, utilities, food and entertainment. Take the total then multiple by 3 or 6, and you’ll get your goal.
Next, determine how much you can afford to contribute to your emergency account every month. If you don’t have any extra wiggle room, you could consider redirecting some of the money you’re contributing to your investment accounts or 401k, or cutting back on spending, until you’ve reached your goal. Alternatively, if you receive a bonus or tax refund, you can put all or part of it into your emergency savings account.
3. Tackle your credit card debt
Credit card debt is among the most insidious forms of debt because of the high interest rates most cards carry. The current average interest rate on a credit card is 19.04%, which is higher than it’s been since Bankrate began collecting data on interest rates in 1985.
If you don’t pay off your credit card purchases every month, you will pay interest on them. And then if you don’t pay it off the next month, you will pay interest not just on your purchases, but on the interest you were charged as well. Carrying credit card debt for months or even years in a row can get you into a spiral where your balance runs away from you as the interest compounds.
If you are someone who struggles with credit card debt, set a goal to pay more than just the minimum each month. If you have multiple credit cards with different interest rates, prioritize paying the most expensive cards off first. If you’re putting money into investment accounts but carrying expensive credit card debt from month-to-month, put a pause on investing until you can clear your balance. Your highest priority should be to clear your credit card debt so you can start earning interest instead of paying it.
4. Create a budget and stick to it
Saving money is the second most popular New Year’s resolution, but it’s impossible to be successful unless you know how much you’re bringing in and how much you’re spending. That’s where creating a budget comes in. It’s one of the key ways to improve your financial health and can make it easier to keep other financial resolutions.
To create a budget, audit your checking account and credit card statements. Open an excel sheet or Google sheet and put all of your income in one column (this is easy if you receive a paycheck, a little harder if you have contract or freelance income), and your expenses in another. Group your expenses into like-kind categories like rent or mortgage, utilities, food, childcare, entertainment, etc. Then total both columns.
That’s the state of your finances as they currently stand. Are you happy with how things look? Do your current expenditures include deposits into a retirement account, an HSA or emergency savings account? If you want to make adjustments, prioritize the expenses that are inflexible like rent and utilities (for the most part) and start cutting from the other areas. Which brings us to our next resolution.
5. Evaluate where you can cut back spending
Most people have areas of the budget where they can cut back on expenses. Whether it’s buying less expensive brands of clothing, shopping at a less expensive grocery store, making their lunch or coffee instead of eating out or canceling subscriptions, there is probably at least one category in your expense column that could be adjusted downwards.
One area that might surprise you is subscriptions. The average person spends $219 per month on subscriptions which is $133 more than they think they spend. And 42% of people have forgotten that they’re still paying for a subscription they no longer use. So even if you think you’re spending is tight, do an audit of your subscriptions. You might be surprised.
6. Save for your retirement
The average 65-year old couple retiring this year will spend about $400,000 on healthcare in retirement alone. This doesn’t include long-term care costs which are estimated to be $100,000 a year, nor does it include daily living expenses like food, mortgage, travel or entertainment. So if you haven’t started saving for retirement, now is the time to do it. If you’ve paused your 401k contributions to pay for other expenses, now is the time to restart.
The goal most financial advisors give is to save 10% of your income each year for retirement. If that’s not feasible given the budget you created and the spending cuts you made, save what you can. If your employer offers a contribution match to your retirement account, max it out if you can. And remember, your HSA functions like a normal retirement account once you turn 65, except that any distributions spent on qualified medical expenses remain tax-free. So if you can, max out these contributions as well.
7. Look for ways to build your credit
Your credit score affects more than you might think. It affects your ability to get new credit (e.g. a new credit card or loan), it affects the price of that credit (people with higher credit scores pay lower interest rates than people with lower credit scores), it could even affect your ability to rent a house or apartment.
The five tiers of credit are: Poor: 300-579 Fair: 580-669 Good: 670-739 Very Good: 740-799 Excellent: 800+
So how do you increase your credit score? Your credit score is determined by a formula that uses information from your payment history (on-time payments vs. late payments), the amount of debt you carry and the length of your credit history. If you’re a younger person or someone new to the United States that doesn’t have much of a credit history, consider putting a utility bill in your name and paying it on time, as opposed to opening a bunch of new credit cards.
8. Set short and long-term financial goals
A short-term financial goal might look something like, “This month, I want to reduce my grocery spend by $100, then invest what I’ve saved.” A longer term financial goal is something like, “In five years, I want to have saved enough for a downpayment on a home.”
In order to achieve both short-term and long-term goals, you will have to determine what behaviors will help you get there. Reducing your grocery bill by $100 might require you to shop at a cheaper grocery store, buy in bulk or cheaper brands of food and/or make cheaper meals. To save enough for a downpayment, you will likely have to achieve many short term financial goals in a row.
Since changing behavior can be a difficult thing to stick with, pick one or two short-term financial goals to focus on and one long-term goal. Ideally, the one or two short-term financial goals will help you to achieve the long-term one. Once you’ve determined your goals, detail your plan to achieve them including the behavioral changes that need to be made. Make sure you also have a “due date” for goal achievement and put it in your calendar. Then check in on your progress regularly.
9. Make additional principal mortgage payments
If you’re already saving for retirement, contributing to your HSA, you have your credit card debt under control, and you have your emergency savings all squared away, consider making additional principal mortgage payments. If you’re like most people the largest line item in your budget is probably the cost of your home. So the quicker you pay it off, the quicker you free up that monthly expense (and the less interest you pay over time).
If you own your home free-and-clear in retirement (i.e. you have no mortgage payment), you’ll have more stability as you age because your savings will go farther. You’ll also have more freedom to do the things you want to do.
10. Expand your financial knowledge
One of the best ways to improve your financial health is to make sound financial decisions. The best way to make sound financial decisions is to educate yourself. Research different investment options and how they typically perform. Educate yourself on different retirement accounts and their benefits and drawbacks. If you have high credit card debt, look for services that help you consolidate your debt into one low monthly payment.
Once you’ve collected your information, seek professional advice from someone you trust. Ask all the questions. If the answers don’t make sense, ask them again.
Get started with Lively today
Lively is your partner in saving for healthcare and beyond. Our goal is to make it easy and dare we say, “fun” to save and invest your HSA contributions for your immediate and future medical and retirement needs. If you have a question on how contributing to an HSA can help you improve your financial health, reach out today!
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.