New Year, new you! Right? Isn’t that the saying?
Now, I’m all for immediate and radical change if it leads to long-term behavioral shifts. The Whole 30 Diet worked for me and countless others for just this reason. I couldn’t eat sugar, grains, or dairy (and a few other things) for 30 days. None! Zip! No dessert for you! No Saturday morning pancakes with deliciously pure maple syrup from northern Minnesota either! A major intervention like this ultimately helped me learn what foods my body likes and doesn’t like. The lessons learned have been invaluable.
On the other hand, it is difficult to make dramatic change in every aspect of our lives every year. Sometimes, a few small shifts will do just fine, allowing you to continue focusing on whatever is top-of-mind for you in 2019.
Regarding your personal finances, if a few small shifts are what you are looking for this year, or all that you have time for, that’s okay! But let’s do something to improve your finances so that you continue to make progress toward overall financial well-being.
To that end, here’s Three Simple Ways to Strengthen Your Finances in 2019.
Rebalance Your Investment Accounts
One task to accomplish at least annually is to ensure that your investment accounts are properly aligned with your goals, risk tolerance, and capacity for risk. After the bull market of the last decade, many investors are over-allocated to U.S stocks, or even stocks in general. For example, this may be an opportune moment to shift some equity exposure overseas. Emerging market and international stocks have not kept up with their U.S. counterparts over the last ten years. It could also make sense to rebalance toward a larger fixed income or cash position so that you can take some risk and gains off the table with the goal of, once again, balancing your risk exposure. Consider the following basic allocations as a guideline:
- Less Risk: 30% Global Stocks/70% Fixed Income
- Moderate Risk: 50% Global Stocks/50% Fixed Income
- More Risk: 70% Global Stocks/ 30% Fixed Income
None of these may be the right portfolio for you, but they do offer a general sense of what you may target for your unique situation. Not sure what an optimal allocation is for you, or what your risk capacity is? A fee-only financial planner like us, or those found at ACP, NAPFA, or XYPN can help you with that.
Consider Cash An Investment
Most people we do financial plans for confront one of two realities:
- They have WAY too much cash on their balance sheet
- They have WAY too little cash on their balance sheet
Make this the year you do your emergency fund right. If you have too much cash, you’re not so much waiting for a ‘rainy-day,’ as you are expecting a tsunami of grand proportions. That cash could likely be put to more productive use without, necessarily, having to take on an incredible amount of risk. Yes, there will be more risk in any investment beyond cash, but cash has its own risks - like not keeping up with inflation. If your savings account still earns 0%, first consider a different bank. Second, you are losing over 2% of purchasing power every year to inflation. That’s not good. In this case, even buying a Certificate of Deposit (CD) would be a small improvement. Other options may include: paying down debts, growing your fixed income portfolio, dollar-cost averaging into stocks, buying a rental property, re-sizing your home, or even, in some cases, upping your spending if you’re being overly conservative with your budget!
On the other hand, many others don’t have enough cash on their balance sheet to protect them from adverse scenarios. Sometimes, the only option is to spend less or downsize one’s life. Other times, we can simply re-allocate from an investment account into cash. In certain situations, it may even make sense to slightly reduce your retirement account contributions to boost your cash savings (and then shift back once the emergency fund is established.
All to say, though how you enact and the directional flow (i.e. more cash or less cash) will be unique to your situation, make 2019 the year you get your emergency fund right. For some thoughts on what a proper emergency fund looks like and why you need it, see here: Why the Rainy Day Fund is the Cornerstone of Successful Personal Finance
Save Just 1-2% More
If you contribute to your retirement accounts, good on you! Many people don’t.
We believe best practice is to save at least 10% of your income every year. The vehicle you use in one year may be unique to your present situation (401k, 403b, Roth, Traditional IRA, cash), but the fact remains: Target 10%.
But let’s say you’re not there yet. Maybe you’re just saving enough to get your employer's matching contribution to your 401k, and you don’t do any additional savings. Now, it may be overwhelming to consider boosting that number up from, say 3-5% of your salary, to 10%. That’s okay! Let’s take baby steps instead. For 2019, let’s just boost your savings up 1-2%. Nothing dramatic, just a slight nudge in the right direction. Once you get used to this amount, and its benefits, then in 2020 or 2021 we can boost another 1-2% until you hit that 10% number.
Consider the following example:
Julia makes $100,000 as a nurse practitioner and contributes 3% of her income toward her clinic’s 401k plan. The clinic matches 100% of all contributions up to 3% of the employee’s salary, so Julia receives the full employer match available. (Yay Julia!).
However, Julia knows she should be investing more because she read somewhere that she should strive to invest at least 10% of her gross income ever year. That said, boosting her contributions to 10% seems like too much right now as she is still paying off her student loans. So, Julia considers contributing just 1-2% more of her salary in 2019, and then she will revisit the gross amount in 2020 to see if she can shift even more earnings into tax-deferred savings.
Here’s what that looks like:
If Julia decides to save 4% of her salary, just 1% higher than her current amount, she will boost her monthly savings by $83.33, or $1,000/year.
To illustrate, when done over 20 years, and using an 8% average rate of return, this extra $1,000/year will grow to over $41,000 in her 401k.
Now, if Julia decides to save 5% of her salary, just a 2% push higher, she will boost her monthly savings by $166.67, or $2,000/year.
Once again, to illustrate, when done over 20 years, and using an 8% average rate of return, this extra $2,000/year will grow to over $82,000 in her 401k.
Even better, all the above is on-top of Julia’s existing savings and her employer match. More, because Julia is contributing to a tax-deferred 401k, her additional contributions will save her money on her annual tax return which is another big win.
Make It Easy On Yourself
So often, when it comes to New Year’s Resolutions, big desired changes, or our personal finances, we think so large that the change itself overwhelms us and halts us from doing anything at all. If that’s the case for you, consider making just a few simply changes this year to get your financial life moving in the right direction. Steady progress may not be as exciting as dramatic change, but it is significantly better than no progress.
This year, consider the three simple suggestions above to strengthen your finances in 2019 and see how that feels. Next year, do a little more. In this way, the dramatic change you desire may happen sooner than you believe possible.
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