The year is coming to an end, and it’s a perfect time to reflect on both the good and the bad that has happened in our personal lives over the last twelve months. Maybe you welcomed a new child or grandchild to your family. Maybe you added a cat to your household – or two, if you’re me. Maybe you went on a memorable vacation, lost a loved one, changed jobs…okay, I realized I’m just reviewing my own year. In any case, a lot can happen in a year. Much of what happens in any given year is beyond our control, but there are a few things we can control that make a big difference.
Cue: the New Year’s resolution. Traditionally, we make commitments in January, and often times they are a result of what happened the previous year. Maybe you gained a few pounds, so you resolve to get to the gym more often (membership incentives are ridiculous in January). Maybe you didn’t see your family as often as you had wanted, so you resolve to call your mom every week (or month, or quarter). Maybe you didn’t heed the advice of your favorite financial planning blog and you completely blew your Christmas budget, so you resolve to make better financial decisions. How, exactly, do you do that?
The truth is, making good financial decisions probably won’t come as a result of a New Year’s resolution. That’s not because resolutions aren’t related to money – in fact, 42.1% of 2016 resolutions were related to money. It’s because people don’t actually keep their New Year’s resolutions. Only 9.2% of people felt they achieved their New Year’s resolution in 2016.
Many people who are financially successful aren’t making New Year’s resolutions, they’re making lifestyle changes. They’re making positive choices out of habit. How can you do the same? Consider what you do with your extra income when you get a raise or a promotion. Many employers give annual pay raises around the first of the year, and the average salary increase for next year is projected to be around 3.0%, similar to years past. Did your expenses actually increase by 3% this past year? Maybe your grocery bill or your utilities did, but what about your mortgage? Probably not. When you get a pay raise or a promotion, consider contributing extra towards saving instead of planning on enhancing your lifestyle. If you’re not contributing the maximum allowable amount towards your retirement accounts, that can be a great option for your extra income.
Another option is to examine your emergency fund. The common rule of thumb (read: not applicable to everyone, so take this with a grain of salt) is to have 3-6 months’ worth of expenses saved up in cash for emergencies such as job loss or unexpected expenses. If you’re not there yet, try setting up an automatic transfer each month to build that account balance to what it needs to be. When you’ve reached your goal, don’t start spending the amount you were previously saving. Apply it to something else, like retirement savings or debt reduction.
Speaking of debt reduction, that’s another way to habitually make good money choices. Setting up an automatic payment beyond the minimum required payment is one of the easiest ways to make hands-off wise decisions with your money. When your loans are paid off, again, apply that former payment amount to something else positive.
I’d like to throw out another option that you might not hear very often. There are really three choices of what you do with your money. Spending and saving are two options, and the third is giving. Habitually giving is another lifestyle choice that comes with time. If you’re charitably inclined, consider a methodical approach to increasing your giving, like evaluating your giving amounts once every six or twelve months, using pay increases to meet your charitable goals, or routinely using part of your bonus to give to those in need.
Finally, there’s a lot of noise out there encouraging you to make extreme decisions with your money, like applying every possible cent towards debt reduction (at the expense of saving for retirement), never going on a vacation until you max out your retirement accounts, never paying off debt early because maybe you can get a better return with investments, etc. I like to draw a parallel between making positive money decisions and making positive health decisions. It’s largely agreeable that a successful diet and exercise routine isn’t found by going from sitting on the couch all day eating potato chips to working out 120 minutes 6 times a week. It’s simply not sustainable. You’re not used to it, you burn out, you get discouraged, and you give up. Instead, you develop a healthy routine by taking smaller steps towards healthy behavior. You may exercise for 20-30 minutes a few days a week, still indulge in your favorite snacks on occasion, and work towards healthier habits that eventually become your lifestyle. Making good decisions with your money is similar. Consider taking small steps like using a pay raise to pay down debt, or when a loan is paid off, using that cash to contribute towards retirement. Lastly, don’t forget to treat yo’self every now and then so that you don’t get burned out. Eventually, making healthy financial decisions will become habit, and making a financial New Year’s resolution will become a thing of the past.