I’ve never been a fan of New Year’s resolutions. It’s usually a last-minute, half-hearted attempt to do something different or better. Then, a week or two into the year, things are back to normal. There’s a few reasons for this.
First, there’s the idea that self-improvement can only start on January 1. What if I’m not serious about losing weight until May? Wait seven months? That’s one reason most fail. Our hearts aren’t 100% committed. We know we need to do it, we just don’t want to yet.
Second, most resolutions are about breaking old habits. You’ve been doing something for a decade or two (or five) and now you want to quit? It’s possible with a lot of hard work. Given the choice of breaking a habit or finding a way around it, I have a higher chance of success with the latter. We can take advantage of systems that simplify or automate things. For instance, if I have a habit of forgetting things, like paying the bills or making IRA deposits, I can automate it.
Third, most resolutions are too generic – lose weight, learn something new, or enjoy life more. What do they all have in common? No plan! What do you think has a higher chance of success – I want to lose weight or I want to lose 20lbs. in six months by cutting carbs, working out three days a week, and walking a mile on the other four. It’s not the best plan, but it’s better than blindly losing weight.
With that in mind, here are three easy financial resolutions worth doing this year. Once done, you’ll be more prepared financially than most people.
1. Build a Plan, Stick To The Strategy
Saving and investing is a process that starts with a plan. This is true for paying off debt, setting a budget, and saving for retirement. It’s built from the goals you set for yourself and family. You need to be thorough. This financial checklist and retirement guide can help you get started.
Most of our financial goals are long-term. The big ones are anyways. Your investment strategy should be long-term too.
If we learned anything about the financial crisis, it’s that all things eventually pass. Only five short years ago, the sky was in an endless free fall and there was no way we would recover, right? That’s what it seemed at the time. Yet, it wasn’t the first time the market crashed. It won’t be the last one either.
The next time a crisis hits don’t be one of the many investors who willfully toss out their strategies under the guise of protecting their money. You get around this two ways. First, don’t invest money you need in the next year or two. Second, whatever you do, don’t abandon your strategy. Hey, if you see a pattern of strategy abandonment issues see #2.
2. Figure Out Your Investing Behavior Patterns
The big sales pitch from index fund companies is that most fund managers underperform index funds. What they don’t tell you is that the average investor underperforms index funds too. Being human is the common denominator here.
The fact is, we’re our own worst enemy when it comes to investing.
Why? The world is full of little triggers that push and pull us in different directions. We’re impulsive, overprotective, fearful, greedy, along with a slew of other behaviors waiting to wreak havoc on our money. Not a great combination when your retirement savings is on the line.
The fact is, the best investment strategy won’t stand up to emotional decisions. You become a better investor by understanding how you act and react to each trigger. Then use it to your advantage. Start by keeping track of your mistakes and why you made each one.
You can build a checklist to go through before you buy and sell anything. Over time, you’ll ween yourself from the costly mistakes that plague most investors. If that means taking a hands off approach, so be it.
Anything we can do to avoid mistakes when we mentally wander off, will improve our success.
3. Save 1% More!
We can all save more money and this is easy enough. The next time you’re at work call human resources. Tell them you want to increase your 401k contribution. You’ll get a form to fill out the new monthly amount. Add one percentage point more, sign it, and you’re done. Resolution complete!
Don’t have a 401k? Then do it with an IRA. Take 1% of your income, divide it by twelve months, and set up monthly automatic deposits in that amount. Both can be done in a few minutes. Now you can use the rest of the year to enjoy life more.