Six Financial Resolutions
Resolutions for the new year.
Here it is, the new year. As 2024 comes to a close, it seems a good time to look back on the year and take stock of different aspects of our lives. Of course, as a financial advisor, I am keen on looking back on the financial side of things. We saw many different aspects of the economy play out over 2024. Inflation seemed to settle in for (hopefully) a soft landing. Equity markets were up across the world; over 14% in the U.S. alone. Gold was lucrative. Even bitcoin speculators were rewarded for their zeal. There were some losers, however, as bond investors saw flat to negative results over the past 12 months.
As interesting as these macroeconomic facts are, the truth is they are only a part of your personal financial life. Despite good or bad economic years, successful investors and consumers tend to pursue healthy financial behaviors that offset (or thrive on) whatever the global markets are doing. These external factors can help or hurt a lot. But, personal financial habits are key to their (and your) success.
So as the new year arrives, it is time to revisit some of these healthy financial habits. It’s time to commit (or recommit) ourselves to building a robust and resilient future for ourselves, no matter the economic tailwinds or headwinds. Perhaps you already have new goals and behaviors in mind. Perhaps you already know where you’re falling behind. If so, good luck and Godspeed in the new year. If not, here are six resolutions, ranked least to most important, you might want to consider for 2025.
6. Increase retirement savings by 1%
In a recent article, I talked about the power of increasing your retirement savings by 1% for every pay increase, annual or otherwise. Read more about this idea here. If you’re fortunate enough to receive a cost of living increase in the new year, this is a great time to consider increasing your savings rate by 1%. If you’re someone who is currently saving less than 10% of your income, you should consider adding even more percentage increases. Just make sure you can manage your day to day expenses (more on this later).
Making multiple small, incremental increases in your retirement withholdings every year can magnify the already powerful effect of compounding returns. Even more interesting is that this resolution can often be achieved while still enjoying annual increases in your standard of living. Make the 1% bump in 2025.
5. Commit to an additional debt payment amount.
If you have any high-interest or unsecured debt, this resolution can be very helpful. These types of debt typically consist of revolving credit card balances, personal loans, some types of car notes, and generally any other debt with interest rates exceeding 5-6%. Even if you only have lower interest debt such as mortgages or low -interest student loans, this resolution can still have powerful results over time.
For most any type of debt, there are usually minimum payments due each month. These payments typically account for all of the interest accrued over the month as well as some portion allocated towards principal. Adding any extra amount to these minimum payments is very beneficial. This is because ALL extra dollars paid above the minimum will be allocated towards principal. This ends up reducing debt much faster than paying the minimum alone.
There are two main strategies to this method. Read about the Snowball and Avalanche methods here. Regardless of which method you prefer, committing an additional amount of money towards your debts can provide huge savings over time. Ironically, the more debt with higher interest rates you own, the more powerful this method can be.
4. Commit to giving to charity.
Of all the resolutions here, this is my favorite.
The other resolutions in this list are all quantifiable. That is, there is some amount of math, percentage, or money required to make them work. Giving to charity, on the other hand, is purely qualitative. This isn’t about the numbers, it’s about purpose. After all, even a child knows that giving away your money isn’t a sound financial strategy.
Giving your money away isn’t about increasing your wealth from a numbers standpoint, it’s about increasing your wealth from a satisfaction of life and happiness standpoint. We spent a lot of time balancing checkbooks and examining money using cold hard numbers. Over time, this treatment of money can blind us from the true value of money as a tool. Sure money can be used to buy things for ourselves, but only when we freely give money away to worthwhile charities do we feel the pure purpose that money can provide.
Of all the ways we can choose to use money, giving to charity is the most freely altruistic choice we can make. Doing so helps us recalibrate how we view money. It rebalances the way we use it for good-natured purposes. Finding even a small amount to give each month can serve as a helpful reminder of the true value of money and our ability to use it in the best way possible
3. Know where your money went.
The new year is a perfect time to look back at how your money was used throughout the year. In a recently published excerpt from my book “Principles of Prosperity,” I talk about the importance of examining your cash flow to see how your money is being spent throughout the year. Read the published excerpt here. Unfortunately, if you haven’t kept a record of your spending, this can be difficult to achieve.
If you use credit cards for all of your purchasing, that is a great place to start. By downloading and examining all your statements from the year, you can get a good idea of where you spent your money. Even better, websites and apps such as Monarch and YNAB can help track and categorize your expenses no matter the accounts used. If you’re a business owner, Quickbooks is an effective way to do the same. If you don’t have a way to track your expenses, then your resolution should be to subscribe or commit to a tracking system in 2025. If you do have a way to look back, take time to examine where your money has gone and where improvements could be made.
2. Decide where you want your money to go.
If looking back at where your money went is important, then deciding where you want your money to go is even more critical. After all, you can’t do anything about the past but you can always make better decisions going forward. For a more in depth discussion about this resolution, read chapter five of my book “Principles of Prosperity,” aptly titled “The B word.” Principles of Prosperity is available now for free download.
Creating a budget is a painful necessity. No one enjoys doing it. Creating future guidelines for your future expenses can feel overwhelming if not impossible. However, after looking back at where your money has gone, creating a budget for your future income is the best way to make sure you’re on the right path from a cash flow standpoint. And remember, there’s nothing permanent about a budget. It should be amended regularly to reflect changes in your life or simple misestimations. Don’t give up on it!
Fortunately, if you’ve chosen to use an app or website to track your expenses, guess what: most of them can also be used to create a budget and track your progress going forward.
1. Spend less than you make.
This is less of a suggested resolution and more of a mandatory devotion.
Spending less than you make is the single greatest indicator of financial success. You cannot (and should not) expect any amount of financial health if you cannot limit your spending within your income over the long run. Simply put, there is no financial strategy, portfolio, or advice magic enough to overcome the laws of math. If your spending exceeds your income for too long, you will end up in increasing debt and headed towards ruin.
Compounding interest works towards creating wealth; it also works in destroying it. Keep that in mind.
Spend less than you make. Do it with purpose and you will end up intentionally successful; do it without purpose and you will end up accidentally successful. No matter the way you get there, make a plan to spend less than you make. Not only will it make every resolution listed above easier and more pleasant, it will compound the gifts you leave for your future self and others. If you choose no other resolution on this list, make this a priority. Commit to spending less than you make.
