Get your Finances in Shape for 2019 with these 3 Financial Resolutions

Presented by Joshua Bradburn, CFP?, CWS?

When you talk to people about New Year’s Resolutions, they typically have something to do with either fitness or finances—or both! In fact, every January, I notice an increase in how busy my gym and my office are. When it comes to resolutions, I find that it helps to make them specific and actionable. Here are three resolutions that can help increase your financial fitness today and in the New Year.

Resolution 1: Create a budget for life 

When it comes to finances, life can be viewed as cash flowing in—and out. Saving and investing during your working years, if you stick with it, could lead to a rising net worth over time, enabling you to potentially achieve many of life’s most important goals. Creating your own budget and net worth statement can help you build your road map and stay on track.

·        Create a budget and pay yourself first. If you’re not sure where your money is going, track your spending using a spreadsheet or an online budgeting tool for 30 days. Determine how much money you need to cover your fixed monthly expenses, such as your mortgage and other living expenses, and how much you’d like to put away for other goals. For retirement, our rule of thumb is to save 10–15% of pre-tax income, including any match from an employer, starting in your 20s, then add 10% for every decade you delay saving for retirement. Once you commit to an amount, consider ways you can save automatically. Research shows that if you “pay yourself first,” it makes savings easier.

·        Calculate your personal net worth annually. It doesn’t have to be complicated. Make a list of your assets (what you own) and subtract your liabilities (what you owe). Subtract the liabilities from the assets to determine your net worth. Don’t panic if your net worth declines during tough market periods. What’s important is to see a general upward trend over your earning years. If you’re retired, you’ll want to plan a drawdown strategy to make your net worth last as long as necessary, and to support other objectives

·        Project the cost of essential big-ticket items. If you have a big expense in the near term, like college tuition or roof repair, increase your savings and treat that money as spent. If you know that you’ll need the money within a few years, keep it in relatively liquid, relatively safe investments like short-term certificates of deposit (CDs), a savings account or money market funds.

·        Retired? Invest your living-expense money conservatively. Consider keeping 12 months of living expenses after accounting for non-portfolio income sources (Social Security or a pension) in short-term CDs, an interest-bearing savings account, or a money market fund. Then keep another one to four years’ worth of spending laddered in short-term bonds as part of your portfolio’s fixed income allocation. This can help provide the money you need in the short term, allowing you to potentially invest other money for a level of growth potential that makes sense for you, which could reduce the chances you’ll need to sell more-volatile investments (like stocks) in a down market.

·        Prepare for emergencies. If you aren’t retired, we suggest creating an emergency fund with three to six months’ worth of essential living expenses, set aside in a savings account or money market fund. The emergency fund can help you cover unexpected-but-necessary expenses without having to sell more volatile investments. 

Resolution 2: Manage your debt

Debt is neither inherently good nor bad—it’s simply a tool, if used smartly. For most people, some level of debt is a practical necessity, especially to purchase an expensive long-term asset to pay back over time, such as a home. However, problems arise when debt becomes the master, not the other way around. Here’s how to stay in charge.

• Keep your total debt load manageable. Don’t confuse what you can borrow with what you should borrow. Keep the monthly costs of owning a home (principal, interest, taxes and insurance) below 28% of your pre-tax income and your total monthly debt payments (including credit cards, auto loans and mortgage payments) below 36% of your pre-tax income.
• Eliminate high-cost, non-deductible consumer debt. Try to pay off credit card debt and avoid borrowing to buy depreciating assets, such as cars. The cost of consumer debt, if you carry a balance, adds up quickly.  

Resolution 3: Optimize your portfolio

We all share the goal of getting better investment results. So create a plan that will help you stay disciplined in all kinds of markets. Follow your plan and adjust it as needed. Here are ideas to help you stay focused on your goals.

Focus first and foremost on your overall investment mix. After committing to a savings plan, how you invest is your next most important decision. Have a targeted asset allocation—that is, the overall mix of stocks, bonds and cash in your portfolio—that you’re comfortable with, even in a down market. Make sure it’s still in sync with your long-term goals, risk tolerance and time frame. The longer your time horizon, the more time you’ll have to potentially benefit from up or down markets.

• Diversify across and within asset classes. Diversification* can help reduce risks and can be a critical factor in helping you reach your goals. Mutual funds and exchange-traded funds (ETFs) are great ways to own a diversified basket of securities in just about any asset class.
• Consider taxes. Place relatively tax-efficient investments, like ETFs and municipal bonds, in taxable accounts and relatively tax-inefficient investments, like mutual funds and real estate investment trusts (REITs), in tax-advantaged accounts.
• Monitor and rebalance your portfolio as needed. Evaluate your portfolio’s performance at least twice a year using the right benchmarks. Remember, the long-term progress that you make toward your goals is more important than short-term portfolio performance. As you approach a savings goal, such as the beginning of a child’s education or retirement, begin to reduce investment risk, if appropriate, so you don’t have to sell more volatile investments, such as stocks, when you need them.

Finally, remember you don’t have to do everything at once. There’s a lot you can do to improve your financial health. Take one step at a time. Make some real progress on your journey this year.

Joshua Bradburn, CFP?, CWS? is a financial consultant at the Charles Schwab branch in Santa Monica. He has over ten years of experience helping clients achieve their financial goals. Follow Josh on Twitter @JoshBradburnCS. Some content provided here has been compiled from previously published articles authored by various parties at Schwab. Charles Schwab & Co., Inc., Member SIPC.

*Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager. Schwab does not provide legal or tax advice.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

Risks of the REITs are similar to those associated with direct ownership of real estate, such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and credit worthiness of the issuer.

Tax‐exempt bonds are not necessarily a suitable investment for all persons. Information related to a security's tax‐exempt status (federal and in‐state) is obtained from third‐parties and Schwab does not guarantee its accuracy. Tax‐exempt income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.

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