Financial Literacy

The New Year's resolution is one of the enduring traditions of the holiday season. It allows everyone to be extraordinarily optimistic - for at least one day.

Unfortunately, follow-through is often in short supply - many of our resolutions will only live to see on January 2nd, despite our best intentions.

While that's obvious to almost anyone who has ever attempted a half-serious resolution, some hard data quantifies just how difficult keeping such promises to ourselves genuinely is. A University of Bristol study showed that 88 percent of New Year's resolutions fail. Yet that same study also revealed something else that was -equally notable: Men and women maintained their resolutions 10 to 22 percent more often if they engaged in goal setting.

What Is Goal Setting - And Why Is It So Powerful?

The idea behind goal setting is elegant yet powerful. Rather than aspire to some broad, often somewhat generalized goal (such as exercising more often), you instead break down the goal into smaller, discrete steps - this is done at an almost granular level.

For example, instead of saying, "I'll exercise more," someone engaged in goal setting would say, "I'll jog for 15 minutes every day." Instead of saying, "I'll save more money, a goal setter would say, "I'll save $50 each week by cutting these specific costs."

By targeting smaller, precise goals, the idea becomes far more manageable. You're not making wholesale changes to your financial habits - you're just cutting a few specific costs. Breaking significant, seemingly impossible goals into easily accomplished tasks is a great way to break through our tendency to procrastinate. And that's more than half the battle when it comes to achieving significant life goals.

Goal Setting And The New Year's Financial Tune-Up

The New Year is right around the corner - so there's no better time than now to commit to a comprehensive financial tune-up. Yet, as mentioned above, it's important to incorporate smart goal-setting principles to maximize your odds of success.

When preparing to make your resolution, sit down and write out a list of your financial goals. The key is to be as specific as possible. For example, instead of "save more money," write out a list of daily steps to improve your budget - carpooling instead of driving to work or making lunch instead of buying it.

By assigning yourself small, quickly completed tasks, improving your finances becomes sort of a game - almost fun. It also creates a positive feedback loop - as you complete small tasks, you feel better about yourself and increase the odds of achieving the larger goal. Soon enough, you'll wonder why it took so long to start.

The Takeaway

The most significant impediment between us and better financial health is often simple inertia. So, when you design this year's resolution, start with the smallest, most manageable tasks first to build momentum. As you complete each one, you'll realize the power of goal setting.
With this approach, what once seemed like insurmountable financial hurdles will seem like minor speed bumps.

By welcoming the New Year with this structured, strategic approach to goal setting, you're not just making resolutions - you're setting the stage for a year of real financial success.

Achieving financial success can feel as challenging as mastering a new skill - it takes patience, insight, and a willingness to start. Today, we'll explore essential strategies to kickstart your financial tune-up, focusing on actions you can take immediately, most achievable within a day.

Embrace the Power of Decision

The cornerstone of financial improvement is a mental shift - a decisive moment where you choose to take control. Acknowledging and confronting financial challenges can be daunting, yet it's a vital step. Ignoring issues like unpaid bills or mounting debts can worsen a less-than-ideal situation. By facing these challenges head-on, you're already making significant progress.

Evaluate and Adjust Your Budget

As we progress in our careers and earn more, indulging in a few luxuries is natural. This "lifestyle inflation" can be managed with a thorough monthly budget review. Analyze your expenses, identify non-essential costs, and consider where you can save. Budgeting changes might involve tough choices, but the financial breathing room you gain will be worth it.

Hone Your Negotiation Skills

Before eliminating a budget item, consider the art of negotiation. There's often room to negotiate better rates on home internet service, cable television, cell phone plans, insurance, and even loans. Small savings can accumulate substantially over time, freeing up money for other priorities.

Wisely Invest Your Savings

Once you've freed up some funds, the next crucial step is to decide how to utilize them effectively. Consider options like opening an Individual Retirement Account (IRA), setting up automated transfers to a savings account, or increasing contributions to your 401k. Automating these processes can simplify your financial planning and ensure consistent savings.

Conduct a Credit Report Analysis 

A thorough financial tune-up includes understanding your credit standing. Regularly review your credit report from the major credit agencies to spot inaccuracies and identify areas for improvement. Developing a plan to address negative marks will significantly enhance your credit health.

Addressing Diverse Financial Situations

Financial advice is not one-size-fits-all, and understanding this is key to effective financial planning. Different life stages and financial situations call for tailored strategies. Let's delve into three common scenarios to provide more directed guidance.

• Starting with Substantial Debt - If you're beginning your financial journey with significant debt, such as student loans or credit card debt, consider focusing on a solid debt repayment plan. List all your debts, noting the interest rates and minimum payments. Consider strategies like the debt snowball method (focusing on paying off the smallest debts first for psychological wins) or the debt avalanche method (targeting debts with the highest interest rates first). Remember, small, consistent steps toward debt reduction can lead to significant long-term relief.

• For Those with No Savings - If you find yourself without savings, most experts suggest that the first goal is establishing an emergency fund. This fund acts as a financial buffer to prevent falling into debt in case of unexpected expenses. Start small, setting aside a portion of your income with an automatic checking-to-savings transfer each pay period. Even a small amount, like $20 a week, can build up over time. Once you have a modest emergency fund, typically around $1,000, you can then focus on expanding your savings goals - like saving for a down payment on a home, creating a retirement fund, or setting aside money for other long-term goals.

• Optimizing Finances for the Financially Stable - If you're already in a stable financial position with some savings and minimal debt, consider optimizing your finances. This step can include exploring investment strategies to maximize returns in keeping with your risk tolerance. It's also an excellent time to review your insurance coverage and retirement plans to ensure they align with your long-term financial goals. Remember, maintaining a budget and regular financial reviews is crucial to staying on track even when you're already on track.

In each of these scenarios, the key is to assess your unique financial situation and create a plan that aligns with your personal goals and circumstances. Financial planning is a dynamic process, and what works for one may not work for another. Adapting these strategies to fit your life can make all the difference in achieving financial health and stability - and getting started is faster than you may expect.

The Takeaway

While saving that first dollar and changing your financial trajectory may seem challenging, it marks a pivotal point in your financial journey. By committing to a few substantial steps towards financial betterment, you lay the groundwork for remarkable progress in the future. This journey is about consistent, positive choices leading to long-term financial stability and success.

Here's one thing many financially successful people share in common: They carefully, sometimes exhaustively, track their saving and spending. On the other hand, those mired in financial trouble often take the opposite tack - they pay little attention to what's incoming and outgoing, sometimes willfully ignoring negative information.

If you're resolving to undertake a New Year's financial tune-up, and you don't fit comfortably within the first category, it's time to make some changes.

The Value of Evaluating Your Data

In today's "Big Data" society, we can't help but leave fumes of data everywhere we go. The websites we visit, the credit cards we use - it all adds up to an enormous amount of information. So massive, in fact, that an MIT study once estimated the average American office worker creates a staggering 1.8 million megabytes of data each year.

All of that data is pure gold for marketers and corporations. It offers precious insights into our preferences and behaviors. There's absolutely no reason why you shouldn't tap the inherent value of your own financial data for your own benefit. By collecting and analyzing your financial information, you can identify and address patterns of problem spending, and create workable solutions to facilitate more saving.

How Do I Gather My Data?

Getting this information is simple. Just visit your bank's website and download all activity for the previous 12 months. Then review your spending and saving activity with a critical eye. Where and when did you spend too much? Are there commonalities between your spending splurges? Did you save consistently? Did you rack up unnecessary fees? If so, how can they be avoided?

Most major banks also have online tools you can use to take a deeper look at your spending habits. Many offer comprehensive money-management dashboards that allow you to track all your activity across every account. Graphs will show you exactly where your money is going, on a percentage basis.

The Spending Tracking Epiphany

For many people, tracking an entire year's worth of spending is an eye-opening experience - almost an epiphany of sorts. For example, you might estimate that you spend $500 each month on food, only to realize you spend more than double that amount. Or you may have no idea how much you're spending on gas or entertainment.

While most of us know exactly what we pay each month for major recurring expenses such as cars or mortgage payments, discretionary spending is typically far murkier. Many times, we simply have no idea what the real scope of our spending is. A thorough 12-month review is one of the best ways to find out.

The Takeaway

If you're aiming for a full financial tune-up, it's critical to have comprehensive and accurate information with which to work. By reviewing your expenditures for the last 12 months, you can get an honest picture of your true spending behavior - and then make any necessary changes.

The end of the year is the perfect time to take a quick financial inventory - a look at how the last 12 months have gone and whether your position has changed for better or worse.

Have you accumulated more debt or reduced your debt load? Are you distinguishing between "good" and "bad" debt? Has your net worth gone up or down? Are you achieving your goals? Are you sure you've set the right goals to achieve?

Let's examine these questions in detail and discuss some steps you can take to make next year's inventory a happy one.

Analyzing Your Debt

As part of an annual review, ensuring everything is accurate is a good practice. You can take this step by requesting a copy of your credit report (ideally, a copy from each of the three major credit reporting agencies) from the free AnnualCreditReport.com website and reviewing your debt history with a fine-tooth comb. Mistakes happen, so you must verify that your credit history is correct.

Now that you have a comprehensive list of what you owe, it's time to look at the nature of your debt - whether it's categorized as "good" or "bad." The distinction is simple: good debt has some utility while bad debt doesn't. For example, student loans are debt, yet they're also a passport to increased lifetime earnings. High-interest credit card debt, however, has little to no benefit.

If you have trouble with debt, your annual tuneup is a great time to make a plan to bring your debt levels under control. Generally, it would help if you focused on paying off bad debt first, as good debt often comes with more generous terms and lower rates. While it's almost always good to aggressively pay down your debts, you must avoid pursuing debt reduction so vigorously that you place yourself in a financially precarious position. Always ensure you have enough money to cover your expenses and enough savings to weather a disruption in your income.

While you're at it, consider a quick calculation to determine your net worth. Add up all your assets, then subtract your total liabilities from that figure to calculate your net worth. Assets include your residence, furnishings, stocks, bonds, cash savings, retirement plan value, and other items that can be quickly sold. Typical liabilities include a home mortgage, credit card debt, and other loans. This calculation sets a benchmark so you can objectively chart your progress over the next year.

Are You Reaching Your Goals?

Setting well-defined, manageable, and measurable goals is essential to successfully managing your finances. Take a minute to evaluate how closely you've adhered to your goals over the last year. Suppose the answer is "not very." Use this financial tuneup to re-engineer your goal-setting process. Start by breaking your larger financial goals into smaller, easy-to-accomplish daily tasks - the first few should take no longer than a few minutes.

By taking this step, you develop a self-reinforcing routine - something that's critical when fighting the urge to procrastinate. By setting yourself up for some easy, early successes, your goals will begin to seem well within reach - and your finances will reap the reward.

The Takeaway

An accurate snapshot of your finances is a key part of any financial tuneup. You can create an informed list of goals by evaluating and analyzing your overall financial health. Remember to ensure your goals are precisely defined, realistic, manageable, and measurable.

Few of us would feel confident about representing ourselves at trial or performing a medical procedure on ourselves. Yet when it comes to money, we're much more likely to depend on our own expertise - even if that expertise may be decidedly limited.

Is the do-it-yourself approach the best way to manage your money? And if not, is there a milestone or a benchmark beyond which it makes sense to bring in a professional?

Let's find out.

Do I Need a Financial Planner?

The first thing to understand about financial planning is that it's not simply the preserve of the wealthy. You don't need a massive portfolio to benefit from professional planning. Suppose you're a relative novice in terms of finances and investment. In that case, a planner can provide crucial assistance with fundamentals such as goal setting, investment options, and life insurance needs.

The most valuable thing a financial planner can offer is experienced judgment. A good planner knows when you'll need specialized help from an attorney or an accountant. A skilled planner can also help you avoid mistakes that cost you significant money in the years ahead. Getting expert guidance early can place you in the most advantageous position for long-term growth.

No magic number or threshold for assets makes hiring a planner a wise choice. Choosing when to opt for a planner is primarily a judgment call; if you feel your assets are substantial enough to make doing it yourself a risky proposition, it's probably the right time to hire a planner.

The Financial Planning Checklist

If you're unsure if hiring a planner is the right move for you, ask yourself the following questions:

• Do I feel knowledgeable about the market and the investment world?
• Do I have enough time to devote to actively managing my finances?
• Do I have the skill to make informed judgments about savings goals, investment opportunities, asset allocation, and insurance options?

If the answer to the above is a resounding "yes," you may be OK handling your own money - at least for now. Yet, if there's any concern, hiring a professional is at least worth exploring.

Finding the Right Planner

When evaluating financial planners, a crucial aspect to understand is fiduciary duty. This duty requires financial planners to act in the best interests of their clients above all else. Fiduciaries are legally and ethically bound to recommend financial strategies and products that best suit their client's needs, not the options that may provide the planner with the highest commission. This commitment ensures that a planner's advice and guidance are aligned with your financial goals, providing an added layer of trust and security in the planner-client relationship. When evaluating planners, most experts suggest ensuring that the planner is a "fiduciary financial planner" or simply a "fiduciary." 

Further, understanding the difference between fee-based and commission-based financial planners is vital. Fee-based planners charge a set fee, which could be hourly, a flat rate, or a percentage of the assets under management. This model aligns the planner's incentives with the client's interests, as their compensation is not tied to the sale of any particular product. On the other hand, commission-based planners earn money through commissions on the products they sell, such as mutual funds, insurance policies, or stocks. This model could lead to a conflict of interest, as the planner might be incentivized to recommend products that yield higher commissions rather than those best suited to the client's needs.

Generally, a planner who charges an hourly rate is often a better long-term deal than a planner who charges a percentage of assets under management. Even a 1% annual fee can add up. For example, a $100,000 nest egg that earns an average return of 6% would be worth nearly $1.1 million over 40 years. But with a 1% annual fee, the final balance would be under $750,000.

If you think you'd benefit from a financial planner, the next step is finding the right person to help. This task can seem daunting, particularly if you need a referral on which to rely. In short, it's best to focus on someone with solid industry credentials (such as the CFP designation, which stands for "Certified Financial Planner") and positive client feedback. You can also verify that a planner is in good standing by visiting the CFP Board of Standards website.

Once you've compiled a list of candidates, schedule interviews with the planners who seem like the best fit. Ask them about their fee structures, experience, and why they'd be the best choice for someone in your position.

The Takeaway

While there is no one-size-fits-all answer to whether you need a financial planner, understanding the significance of fiduciary duty and the implications of different fee structures can significantly aid in making an informed decision. 

The key lies in choosing a professional whose expertise, ethical standards, and approach align with your financial goals and circumstances. Ultimately, the right financial planner can be a valuable ally in navigating the complex world of personal finance, helping to turn your financial goals into reality.

So how does one create the optimal conditions for success? It's typically not a matter of the type or number of goals you set but how they're conceived and designed. Today, we'll talk about a goal-setting device that's easy to remember and implement but also provides the best odds of achieving success - the SMART goal.

The Power of SMART Goals

What separates a garden variety goal from its SMART brethren? Five key attributes. A SMART goal is:

• Specific
• Measurable
• Attainable
• Realistic
• Timely

Why are these characteristics important? Let's start with specificity. Overly broad or vague goals can be challenging to achieve. We often don't know where to start - so we never do. Specific goals, however, seem far more attainable. While the vague goal of "losing 50 pounds" seems like an enormous undertaking, a particular goal such as "cutting out soda and sugary treats for one week" seems far more realistic. The same logic applies to financial goal setting – rather than setting a goal of "saving more," you could aim for a specific goal such as "increase monthly savings by $200."

SMART goals are also measurable. Without some way to gauge our progress, we quickly lose interest in our goals. We need the psychological boost that marking progress toward a goal provides. It allows us to view a larger goal in smaller segments and track our success as we move forward. If you can't measure it, you can't manage it.

Goals that aren't attainable are, by definition, doomed to failure. While it might be nice to fantasize about being a millionaire in five years, the odds are probably against it - it's unrealistic for most people. Yet many of us can divert five percent of our income into an IRA, which is a simple act that has made millionaires out of countless people over a longer time horizon.

Realistic goal setting is also critical. Failing to meet unrealistic expectations is a form of self-sabotage. Start with smaller goals that are well within your power to realize, then work toward more complex goals as you gain confidence and momentum. Realistic goals help maintain motivation and ensure continuous progress without leading to burnout.

Finally, SMART goals are timely - yet flexible. Assigning a deadline to your goals creates a sense of urgency and helps prioritize tasks. A realistic schedule lets you track your progress and provides positive reinforcement once it's completed. However, it's essential to avoid becoming so wedded to specific deadlines that you lose sight of your larger financial goals. The destination, rather than the journey, matters the most.

The Challenge

As part of your New Year's financial tune-up this week, take up the challenge to create a series of SMART financial goals. Begin with immediate, small-scale goals you can accomplish daily over a week. Adhere to the SMART framework to ensure each goal is structured for success.

Once you're in a rhythm of accomplishment, you can expand the scope of your goal setting and create a list of longer-term goals you can revisit on the next New Year's Day. By putting some serious forethought into the design of your goals, you dramatically increase your odds of success. Whether aiming to bolster your savings, reduce debt, or invest wisely, the SMART approach is your ally in turning financial dreams into reality.