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Financial Planning Resolutions That Only Take Minutes

·5 min read

Procrastination is a uniquely insidious trait in many humans, at least as it relates to the rest of the wild kingdom. While I could certainly attest to my cat being lazy, most creatures of the wild recognize waiting for tomorrow to be the difference between surviving and starving. So, we resort to New Year’s resolutions as a way of committing to self-improvement.

Many of the usual resolutions are easy to commit to, but challenging to adhere to. Whether it be diet, exercise or smoking cessation, Jan. 1 is just one day. Sticking to it for another 364 is the real challenge.

In the face of the unprecedented uncertainty and unexpected financial strain that many have contended with in 2020, setting financial planning resolutions for 2021 may seem daunting – but even small steps can keep you moving in the right direction. Here are a few tips to get it right:

  • Take inventory once per year. This takes 10-45 minutes, and don't over-engineer it. Write down your assets (things you OWN) in one column and liabilities (debts you OWE) in another. Assets will include savings accounts, retirement accounts, real estate, car(s), etc. Liabilities will be credit cards, mortgage, student loans, etc. Attach approximate values to each. If you are a spreadsheet-type of person, all the better, but a piece of paper works fine too. Once done, you've created a household balance sheet. It’s a start!

  • Resolve to make the simple step of increasing your retirement plan contribution by 1%-2%. This takes only two minutes per year and can be quite potent in strengthening your retirement plan. Do the math – if you make $70,000 per year and get paid every two weeks, increasing your retirement plan contribution by 1% only subtracts a mere $26 per paycheck. This is the single most powerful way to assure that come age 65, you don't look around and say: "What just happened?"

  • Evaluate the risk you have in your investment accounts. This is also quick – only five to 30 minutes each year – but a must do. If you are young, you can embrace more risk, and as you age, slowly back off on risk. This can also get a little tricky, and you should lean on a financial adviser who’s educated in the risk/reward tradeoffs of investments to get the most accurate assessment.

  • Evaluate your expenses. This one may be the most painful, but it can also be eye-opening and fruitful. Plan to sit down for 60 to 90 minutes every few years and track EVERY expense that you have for a three- to six-month period. Everyone will find themselves asking the proverbial "why?" on at least a few parts of that list and identifying ways to cut down. When you reduce expenses, even if it’s $25 per month, you MUST APPLY these savings to your retirement plan and/or debt reduction. If you don't, you risk starting the same cycle all over again.

These resolutions are simple, but they can pack a powerful punch. Here’s two true stories of many I’ve seen as an adviser that demonstrate just how impactful these goals can be.

The first is a client I first met five years ago when she was 25. She was starting her adult life after struggling with a multitude of significant challenges. We discussed the need for an emergency fund, and she got it done. We reviewed the need for life insurance when she became pregnant. She and I fought through the underwriting challenges with various carriers, and finally got that done too. I said she should start a Roth IRA, and she did it with a mere $50 per month. When she had to pull back on savings due to unexpected circumstances, she moved the dial back when circumstances improved. The list goes on and on. She TOOK ACTION, and continues to do so. In 35 years, she will look back and marvel at what she has accomplished.

I have another client who is 53 and had to take a pay cut in the COVID-19 crisis. For the first time in 30 years, she was saving nothing, and it was extremely disconcerting to her. She expected me to share the angst, and to her surprise, I didn’t. She had spent the last three decades being rigorous and disciplined, and she had built a retirement portfolio of $1.15 million, despite the fact that she had never made more than $70,000 per year. There was no inheritance. No lottery. This was all her doing. I explained her portfolio is likely to grow to $2 million come age 65 even if she doesn't add another dollar (assume a 5% return). Because this portfolio is so strong – even in a time of uncertainty – we’re now in a position to consider early retirement for her.

These two "stories" are real people. One will get it done. The other has already done so. They’ve taken just a few minutes each year to take inventory, evaluate risk, protect the family, and make baby steps that lead to long-term success. So, this Jan. 1, remind yourself financial planning is the easy resolution. Just don't put it off to next year!