What are concrete things you can do with the energy you have to start the new year off right? Here are five things that will start a flywheel of productivity for your wealth.
Start Regularly Tracking Your Key Metrics: Net Worth, Income, and Expenses
You improve what you measure. When a business wants to improve sales, you better believe management is looking at key sales metrics every week like number of prospect meetings, number of signed contracts and the like. You should be doing the same with your finances. How will you cut down your partying budget when you don’t even know how much you spent last month vs this month?
Making this data as simple and easy to access is the key to effective change. You should be able to see this info anywhere, in real-time, with no manual work on your end. Fortunately there are a ton of free and low-cost tools that allow you to do this. The one I use is a free service called Personal Capital. I’ve tried other major vendors like Mint and Quicken and have found that Personal Capital has the best dashboard with easy zoom-in features and ability to cut the data in different ways. You hook up all your accounts and get a bird’s eye view of everything in your financial life.
Expenses: On the expense side, you can see everything from how much you spent in the month vs last month, how much of that was restaurants vs health (all auto-classified), to sorting all of the month’s expenses by amount so you can see where your big splurges were. I also like to use their dashboard to check every month for unauthorized charges, which makes me feel safer and more in control of what’s happening in an environment rife with credit card fraud.
Investments: On the investment side, they also help you benchmark how much you are paying in investment fees against the norm, suggest allocations for how much you should invest in different asset classes based on your goals and age, and will alert you if you have built up a bunch of idle cash that needs to be deployed. The service is free and they monetize by offering additional wealth management services for a fee, which you are free to decline. If this solution isn’t for you, there are a ton of others that can fit the bill like Mint, Quicken, or your own spreadsheet. What matters is that you have something consistent in place that works for you.
Set a Savings Rate and Budget, And Track Them With Your Key Metrics Dashboard From Above
Your savings rate will show you exactly how many years it will take for you to be able to retire. Set a target savings rate for yourself based on how long you’re willing to work with these tables. Build an accompanying budget that meets this savings rate target, and you can begin tracking your progress monthly using the nifty metrics dashboard you set up from above. You will find that seeing the progress in visuals builds enthusiasm and momentum for sticking to a budget. Your reward is seeing that net worth number climb every few weeks or every month. Make sure you couple both this and the tip above to get the maximum impact on your progress.
Set Up Your Money Annual Money Rotation Strategy
If you have dollars working for you in any sort of retirement or taxable online brokerage account, you can rotate your money to a new, equivalent vendor each year to generate meaningful sign-up bonuses. I write about how I use this strategy in Move Your Money: A Rotation Strategy Worth $1000-$4000 a year.
Decide Which Tax-Advantaged Accounts You’ll Fund This Year
Familiarize yourself with all the tax-advantaged accounts available to you and decide which you’ll fund and in what amounts. Where possible, set the allocations to be taken automatically out of your paycheck as soon as possible.
401ks/403bs: What do the options look like for your employer-sponsored accounts? Do they match? What investment options do they offer? To figure out if these are worth investing in you can check out Everything You Wanted To Know About 401ks which walks you through how to evaluate your employer’s offerings and how to read a mutual fund prospectus.
IRAs/Roth IRAs: Do you qualify for and will you contribute to a traditional IRA or Roth IRA? For those who would like to invest in a Roth IRA but who do not meet the income restrictions, consider a backdoor Roth IRA. Note that the earlier in the year you fund your IRA, the longer you have it working in the market for you with its tax-advantaged status.
HSAs/FSAs/Dependent-Care FSAs: Determine which employer-provided accounts you qualify for:
- Health Savings Accounts (HSA) are open to anyone who has a high-deductible health plan. For 2017, the IRS defines a high-deductible health plan for an individual as a plan with an out-of-pocket maximum of $6,550 and a minimum deductible of $1,300. For a family plan in 2017, the out-of-pocket maximum is $13,100 and the minimum deductible is $2,600. If you qualify, the max contribution for an HSA is $3,400 for an individual and $6,750 for a family.
- Flexible Spending Accounts (FSA) let you park pre-tax dollars in an account to use for medical and dental expenses. There are pretty broad guidelines as to what qualifies – everything from medicine and co-pays to glasses. Note that dollars in an FSA are considered “use it or lose it.” If you do not spend them by the end of the year, you will lose all those dollars so you’ll want to plan accordingly and not overfund the account.
- Dependent-Care Flexible Spending Accounts are something many people are not aware may be offered by their employer. For those with dependents – children, a disabled spouse, or the elderly who live with you – you can contribute up to $2,500 if you are an individual or $5,000 if you are married filing jointly into a pre-tax account for expenses like daycare (for adults or children), nannies, and after-school care.
Check out Refinancing Rates on Mortgages and Loans
It’s worth the 15 minutes it takes to check out what the current market rates are on mortgages and student/personal loans that you may be able to refinance. Given the sums involved, a quarter point difference could save you hundreds or thousands of dollars.
For mortgages, I’ve written about my source for the best mortgage rates, which is how I got a mortgage rate that would save me $146k over the life of the loan compared to the next best market rate. For student loans, LendEdu offers a great rate quote tool that only takes a few minutes to walk through. I favor theirs because they have one of the most comprehensive aggregations of potential vendors and also don’t ask for incredibly sensitive details like your social security number just to start the quote, unlike some other major rate comparison websites.
Note that the recently passed tax bill has made some changes to the way mortgages and loans are treated for tax purposes, so you may want to consult a few resources before making moves in this department to ensure you don’t run across unintended tax consequences.
Anything else at the top of your to-do list for the new year? Would love to hear what’s kick-starting your financial plans in the comments below.