Have you decided that 2023 is the year you are going to get your finances in order?
Good news: I have a number of things you can do to make this the best financial year you have ever had. If you didn’t make a resolution to get your financial house aligned, that’s okay; resolutions can be added after the clock strikes midnight. I encourage you to start wherever you are.
The best time to start planning to reach your financial goals was 10 years ago, but the next best time is today.
What Are Your Goals?
When asked what their long-term financial goals are, most people will say something like: “financial freedom,” “to buy a house” or “to retire at age 55.” While those are great wishes, they aren’t truly goals. You need to get specific about what you want and then build the plan that gets you there. If you need $30,000 for a down payment on a house and you need it in one year, that means you need to be saving $2,500/month. Similarly, if you plan to retire and travel around the world you will want to save more than the person who will downsize their house to a cabin by the lake.
Pay Yourself First
One of the most important things you can do is to consider your savings and investing as a monthly bill that you have to pay. Set a budget and think of your savings as a requirement, not what to do in the event you have a few extra bucks. Every one of us can find a few dollars extra in our budget if we are willing to make sacrifices. It may mean giving up that $5 coffee one day a week or maybe packing lunch instead of going to restaurants. Perhaps you are eying that new phone, but instead get a used one or hold onto the one you have for another year. Take that money you would have spent and put it toward your long-term goals. If you can’t possibly save money then it may be time to look for upward mobility at work or a side hustle.
If you can save $4 per day in one year you’ll have $1,460, which over 10 years’ time would total $14,608. If you earned 5% on that money and continued saving for 20 years, that $29,220 you put away would be worth $50,043.
Live Within Your Means
It’s all too often that people who are making $50,000 per year are driving cars that cost even more than that. The problem is you are likely paying $1,000 per month just to drive when you could be putting that money toward something that has lasting value and doesn’t depreciate before you can pay it off. I’ve always maintained that if you can’t pay off a car in three years, you can’t afford it. If you say that the payments are too high unless you get a loan for a longer period of time, then please read the last sentence again.
Every one of us would like to live in a really nice house, and that’s a great goal, but buying a house you can’t afford is a recipe for a miserable life. Would you rather own a more expensive house that causes you stress or one that allows you to save and build for the future?
Never put something on a credit card if you don’t know how you can pay it off within six months or less. If you carry a balance on your credit card, don’t buy anything on your card that is consumed before you pay it off (think groceries, gas or experiences.)
Pay Down Debt
If you have cheap debt like a low-interest mortgage then you may not look to pay that down, especially if you can leverage it to your advantage.
If you have a high car payment or a balance on a credit card, look for ways to refinance them to lower rates if you can’t pay them right away. This may be the place to “pay yourself first.” Pay down your high-interest debt with a plan. For example, if you can pay $2,000 per month, do it. Then once it’s paid off, continue to pay that same amount, paying it into savings and investments for your future. Want to know a secret that I used years ago? I racked up $8,000 in credit card debt when I was newly out of college, so I got a 0% introductory credit card and rolled over the balance. I understood that I had 18 months to pay that balance off and I told myself I couldn’t buy anything else on credit until I paid it off. I did the math and decided that $500/month would get it paid off in 16 months and I carried out that plan. It ended up saving me about $1,500 in extra interest I would have otherwise paid on that 23% card.
Work With a Financial Advisor
If you are a do-it-yourself investor then perhaps you don’t need an advisor, or maybe you just need one to validate what you are doing and give you a few pointers. If you don’t feel comfortable managing money or you aren’t sure where to start, then a professional will definitely be a value to you.
According to a Vanguard study, a financial advisor can generally add about 3% more value to your portfolio over time as compared to not having an advisor. This comes from evaluating your portfolio, using lower-cost investments, access to investments you may not be aware of, rebalancing and helping you stick to a plan and tax efficient strategies. Advisor fees vary, but if you can pay an advisor 1% for the likelihood of earning 3% more isn’t that a good value?
When choosing an advisor, you want to make sure you have someone who is a fiduciary that is acting in your best interest. You want someone who is licensed and who is going to offer you what is best for you and not looking to sell you on something that makes them a commission or hits a company quota. When you speak with them, ask how they get paid. While there isn’t necessarily anything wrong with their company product, if that’s the only thing they can offer, you might want to shop around.
Final Thoughts
Why not make 2023 the start of something great? Even if you don’t have a lot or you are starting late, the best time to begin is today.
