Along with exercising and losing weight, improving one’s financial situation is among the most common New Year resolutions. Whether it’s saving more, spending less, or a combination of both, everyone wants to end 2014 better off financially than they started the year. While there are many effective tactics for improving one’s finances, I’m going to share five of the smartest actions anyone can take to move their finances in a positive direction. I call these the Five Finger Rules for better money management.
Rule #1: Save More
There are countless ways to save money, but I always tell my clients that their first savings priority should be to maximize their contributions to a tax-deferred retirement account. Not only are you saving the money, but you’re also saving on taxes.
- If your employer offers a 401(k) plan, set up an automatic draft so the money goes directly from your paycheck into the account before you have a chance to spend it. If your employer offers a company match, don’t just stop at the amount they will match, put as much in as you possibly can.
- If you’re self-employed, choose a SIMPLE IRA, self-employed pension plan, or individual 401(k) (if you have no employees). These self-employment options set up through your business allow you to contribute more than to an individual IRA.
: Spend Less
Everybody knows that chocolate cake tastes better than carrots just like spending money is more enjoyable than not spending it. But having the discipline to sacrifice some short-term pleasures for long-term benefits is a much healthier and valuable choice whether you’re talking about food or finances. Again, there are lots of ways to spend less, but here are a couple of big ones to consider:
- Investigate your mortgage refinance options. We’re in the fourth quarter and all indications are that rates are going to go up substantially and soon. So, if you’re going to refinance, do it now.
- If you have don’t have an emergency fund equal to about three months of take home income, work to build one. Once you have your emergency fund and you’re in a good cash position, consider increasing the deductibles on your insurance policies, especially when you’re not likely to make any claims on that policy. This will lower the monthly premiums and allow you to put that saved money to work for you to build wealth. Also, you may want to drop any short-term disability coverage-that’s what the emergency fund is for.
: Save on Taxes
I’ve already expressed the importance of maxing out your retirement plan in Rule #1, but let me repeat it, because it’s also the best way to save on taxes. Also, analyze your expenses from last year and see if you can find some personal expenses that were actually business related, and reassign them this year as a business expense. Mileage is a good example. Many people either forget or just don’t want to take the time to track mileage, but if the trip has anything to do with business those miles add up to substantial savings. A friend of mine turned me on to a smartphone app that tracks mileage and automatically generates a spreadsheet report. As a business owner I know that being busy can get in the way of tracking business expenses, but it’s a commitment worth making and technology is making it easier to do.
This is particularly true for retirees living off their assets. If you’re spending less and saving more then you may not need to make any aggressive changes. But if you are spending more than savings and your assets are diminishing, it may be time to make some adjustments and take on a little more risk to increase potential gains. For example, if you have a lot of CDs earning interest at very low rates, consider investing in something with higher yields, like blue chip stocks or corporate bonds.
Change Your Lifestyle
The last thing a financial planner wants to recommend to a client is to lower their expectations and standard of living, but sometimes, it’s the right and necessary decision. I had a friend with a high paying job. His wife stayed at home to raise their three sons. They had a very large home with a very large mortgage payment. He was a disciplined budgeter but his monthly expenses absorbed almost all of his income. He didn’t have enough left over to max out his 401(k), or to invest, or even to save up for their kids’ college education. I told him what he didn’t want to hear… to sell his big house and downsize. Sometimes to make your long-term goals possible, you must sacrifice and make some lifestyle changes in the short term.
I often tell my clients that small sacrifices today usually reap the largest rewards later in life. I call it the path less traveled; I also call it the smart path to financial independence.
Jason Wheeler is currently the CEO and a Wealth Consultant at Pathfinder Wealth Consulting. Pathfinder specializes in comprehensive financial, estate and tax planning services, investment management, and risk management (insurance) for business owners and successful executives. Jason Wheeler offers securities and advisory services through Commonwealth Financial Network®. Member FINRA, SIPC, a Registered Investment Adviser. To learn more about Pathfinder Wealth Consulting, visit www.pathfinderwc.com. Jason can be reached at [email protected] or 910-793-0616.