Making New Year's resolutions is a time-honored tradition of paying attention to something important for a short period of time. Then it’s back to business as usual. In the long run, a couple of weeks of working out or saving money isn’t really the solution. Nor is simply taking a bunch of year-end steps the answer.
The end of a year brings a plethora of articles on things that are often of little value to most people. Those who really should be tax-loss harvesting should find that out from their team of professionals. But for the average person, there’s not a ton of tax-strategy opportunities for year-end.
That said, year-end is a great time to review some things. Primarily things that will help going forward. It’s more about the coming year than the ending one. The average person is better served by looking forward and setting up for what’s to come, rather than making New Year's resolutions.
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1. Retirement Plan Contributions
Unfortunately, many people use a “set it and forget it” approach to retirement contributions. The logic is that pay increases raise contributions made on a percentage basis — no additional input required.
Yet most people are also significantly underfunding their retirements. And they are, on some level, aware of this. The disconnect is that they can’t afford to do more. A damned if you do, damned if you don’t scenario. But there is a solution.
For work plans, increase your contributions by one percent of your pay each year. If you have been making six percent contributions to get all your matching, go to seven. If you’ve been doing seven, go to eight. Then do the same thing every year.
The reason this works is pretty simple. You really won’t miss the one percent, which isn’t even one percent after taxes. But across a few years, the one percents you didn’t miss add up.
You eventually start putting 15 or 20 percent of your pay toward your retirement — and that’s some real bank.
If you don’t have a retirement plan through work, you can still invest automatically for retirement. Investing automatically removes the fallible piece — the human — from the equation.
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2. Clean Up Beneficiaries
It’s amazing how many people have obsolete beneficiary designations. Things like naming the ex-spouse or a deceased parent as beneficiary. This shouldn’t happen. But understandably, it does.
Consider any accounts that name a beneficiary and check the designation. You should do this every year. Situations change. Make sure your beneficiary designations reflect your current wishes.
3. Review Your Coverages
All insurances should be reviewed at least once a year. Your insurance situation is also something that changes across time, and what was appropriate a few years ago may not be appropriate now.
Life insurance needs to change as family situations and goals change. If one of your children graduates from college, and if that was something you had life insurance for, you might need less now. Or if you have a new addition, you may need more.
In addition to making sure your homeowners and auto are appropriate, it's a good idea to shop around for them periodically. Premiums have a tendency to creep up, and there’s really no downside to exploring your options. It could save you a lot in the long run.
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4. Budgeting and Saving
This is a common New Year's resolution. Many people make it year after year, determined that this will be the year it actually works. But somehow nothing changes when nothing changes.
The problem with resolutions is that they require resolve. Plans alone accomplish nothing. It’s pretty easy to envision a well-organized financial life in which money is automatically allocated to appropriate accounts and your system tracks your spending and provides gentle reminders when you go astray.
But resolve is like a mountain. Mountains are tough to cross day in and day out. Resolutions wear you down. You skip a day, then two. Then it’s no longer front and center. Eventually, no one remembers what they even resolved to do.
Then next year, you begin anew. New resolutions, same mountains. The mountains always win.
Some people have the resolve to sit with each take-home pay and divide it into its little increments and send it to the appropriate accounts. It appears they may have taken more than their share of resolve, somehow shorting the rest of us.
But there is a solution: automation. Automation is action without requiring resolve. It does no good to decide to put five percent of your take-home pay into savings for emergencies unless you actually do it. So automate it.
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Taking Action vs. Making New Year's Resolutions
A resolution without action accomplishes nothing. Action, on the other hand, get things done.
Automating is a one-time action. Of course, you’ll need to review things and monitor them periodically. But you’ll have something to review and monitor. The vast majority of people who resolve to change only end up with a new opportunity next year. Resolve doesn’t cut it.
Automate every aspect of your day-to-day finances that you can. Take the steps before year-end. Set up automatic savings to build or maintain your emergency fund. Set up savings for any goals that you can. And set up automatic payments for routine bills. Take resolution out of the equation.
You might even find reviewing and monitoring to be more rewarding. You’re looking at what has been done to see if it’s good, not facing the drudgery of needing to do a bunch of things. Mentally, it’s a lot easier to do. Practically, it’s a lot more likely to happen, judging by history. After all, those few people who somehow got all the resolve don’t read about resolutions.
Those of us who do need systems also need automation. Then we don’t have to rely on resolve, which has let us down for the last time.