Simple Money Steps For End The Year & Start The New One
The end of the year is around the corner while we madly scramble to buy presents, chauffeur kids and get the house ready for guests. At the same time, the last two years have been a rollercoaster in the financial markets. It is challenging to manage demands upon time and money.
Now is the time to assess where you were, where you are and where you are going. To help, follow these suggestions:
- Set a firm holiday budget with a per person limit. Get cash up-front fund this and stick to it. Otherwise, you’ll be tempted to put purchases on a credit card which snowballs at 26% interest. Pre-funding with strict limits prevents a Holiday Hurricane from wreaking havoc upon your life.
- Update your Net Worth Statement annually. List out assets and liabilities. Be as honest and conservative as possible. That car you bought last year is not worth more than you paid for it and the painting you bought is not a Rembrandt.
Construct a second net worth statement only using liquid assets. This removes the temptation to embellish and delivers a very functional viewpoint into how strong and flexible your household is.
- Embrace the Reverse Budget. The first “bill” you pay should funds emergencies. Set aside nine months of living expenses that can be accessed with zero volatility and used within 24 hours. Your second “bill” should be retirement. At least 10% of your pay needs to go into retirement. Sorting bills in this manner helps you save first. Once you set aside the savings component, the remainder can be spent on the rest of your life. You can logically determine how big of a house or car you can afford or whether to take a trip next month without sacrificing savings.
- Debt is an investment decision. However, it is a much different equation today versus two years ago. Sit down and assess interest rates, payment and term. Logically start knocking them out one at a time starting with the highest interest rates. It is a virtual mathematical certainty that carrying a balance at 26% interest is a bad idea. Pay credit cards off every month! No matter how bad things get, you can’t go bankrupt if you owe no money!
- Downsize your life and identify what your American Dream looks like. Look in the mirror and determine how much house you really need. Do you need a new car or will a four-year-old “broken-in” car do the trick?
Regardless of what we have been told for decades, a house is not a good investment. It has negative cash flow with many big-ticket items that break at very unfortunate and unpredictable times. There is nothing wrong with renting.
A new car depreciates 40% in the first two years, but the average car on the road today is twelve years old. If you buy a two-year-old car for 40% off sticker price, it still has a decade of left remaining.
- Maximize your retirement. Contribute enough to get your employers match—it is free money. But don’t stop there—fund your retirement plan to its limit and then add a Traditional or Roth IRA for you and your spouse. Funding retirement can lower current taxes, grow your wealth in a tax-deferred manner and provide protection from creditors.
Your retirement fund is for retirement. It is not to borrow against to buy a new truck and fishing boat.
Plan to live a long time. Social Security will not fund many of your needs. As such, be in a position to self-fund these things.
- Sleep on it. Very few good financial outcomes arrive from making fast decisions. Whether looking to buy a new outfit, a watch, a car or a house—don’t make impulse purchases. Instead, be disciplined. Research it and make informed decisions. After a week or two go by, see if you really want that item.
- Keep an investment journal. Around every corner there is a prognosticator saying it is the best of times or the worst of times. Each time you feel tempted to make a decision, write it down. Review your decisions to stay honest and improve your process.