With a new year and decade upon us, millions of people are making new year’s resolutions, many of which are related to improving their finances. According to the 2020 Fidelity Investments New Year Financial Resolutions study, almost 70 percent of Americans are resolving to get their financial house in order this year. While resolutions are a great start, many people fail at them because they make very generalized goals that fizzle out as the year progresses.
Whether their goal is to score a pay raise at work or boost their emergency savings, few people stick to resolutions for one simple reason: they fail to plan. For those who are interested in investing, the new year is a great time to get educated and come up with a well-rounded financial plan that’s designed for success. Here, we’ll discuss some of the reasons why financial new year’s resolutions often fall flat and why investing combined with saving may be the perfect solution.
What Does “Save More Money” Really Mean?
When people say they want to save more money, most are vague about what that really means and unsure what it will take to achieve noticeable results. Financial experts recommend going beyond the simple “save more” resolution by being specific about what you want to accomplish. Commit to saving a certain percentage per month or analyze your expenses to see where money-saving adjustments can be made. You might also commit to putting a certain portion of your paycheck in a savings account, before expenses or anything else. That way, you won’t be tempted to spend more than you should. For the ambitious, review how much you saved last year and aim to increase that amount by several percentage points.
Another resolution identified by the Fidelity study is spending less. More than one-third of people surveyed stated they would like to cut their spending in 2020. If your goal is to spend less, be specific about how you’ll go about doing that, too. Track your expenses for one month to see where your money really goes, and review credit card statements and bills. Identify areas of overspending and commit to reducing your spending in these places. Then, create a budget with this information — and stick to it.
Save More Vs. Invest More
Although many people resolve to save more or reduce wasteful spending, others dream of taking their finances to the next level in the coming year. If you are considering investing in 2020, you might be wondering if it’s the right financial move.
The goal of investing is to make your money work for you. Today’s savings accounts are suitable options for keeping an emergency fund safe and liquid, but most are terrible for building wealth. For those looking to balance their portfolio, investing is the answer.
Knowing when to start investing involves knowing that you are financially stable enough to make the leap. Don’t invest with money you need for necessities or important expense. Additionally, here are a couple of things to have in place before you start investing:
- Build an emergency fund of at least $1,000, but preferably several months’ worth of living expenses.
- Minimize debt by paying off as much as you can before investing. High-interest debt will cost you more than most investments will yield. Keep in mind that the stock market has historically produced returns of around 10 percent, although that figure can swing in either direction year to year. In addition, some debts — like a mortgage — are generally considered “good” debt, or at least not bad. The interest you pay on a mortgage or student loan is tax-deductible, for example.
- Do your research before making any investment; be sure you know what you’re getting into.
Of course, a well-rounded financial portfolio involves a mix of short- and long-term savings as well as investments. However, there is no rule that states that savings and investments are mutually exclusive. If you are new to investing, try saving and investing in low-volatility options, like money market funds or low-risk mutual funds. Arm yourself with knowledge by learning more about investing, and, as your knowledge expands, considered taking courses or consulting with a financial planner.
Set Reasonable Goals
The easiest way to stick to your new year’s resolutions is to make your goals actionable and achievable. Every great investor had to start somewhere and by educating yourself, you will be empowered to make better financial decisions overall.
In addition, be mindful of your relationship with money and try not to beat yourself up if you encounter a few stumbling blocks along the way. One of the biggest reasons new year’s resolutions fail is because people try to do too much too soon. Get into the habit of saving and being generally more money-conscious, and then move on to loftier goals. Don’t feel pressured to base your goals on whatever others are doing, and always remember that starting small is better than not starting at all.