We’re now a couple of weeks into the New Year and I have to admit that I have mixed feelings about New Year’s resolutions. That being said, resolutions provide us with a framework for putting our personal finances in the right perspective. Call it putting money in its place.
It’s probably being a long-time gym member that has given me a dim view of New Year’s resolutions. Every year, the gym is packed with newcomers in early January, only to be back down to the same set of regulars by Valentine’s Day. It turns out that good intentions aren’t always enough to get people through the day-to-day grind of working out regularly.
Still, maybe it’s different with financial matters. After all, you shouldn’t spend every day of the year fretting about money. There are some personal finance items that you can revisit once a year, and then as long as you make sound decisions about them, you can set them on a course which shouldn’t need as much effort throughout the year.
This is what I mean by putting money in its place: deal with it on your schedule, and then move on to other things. Here are six ways of putting money in its place this way:
- Budgeting rather than reacting. You might think of a budget as something that’s going to intrude on your freedom throughout the year because of the discipline involved, but if you have limited resources, you are going to bump up against financial restrictions anyway, whether it’s by living on a budget or simply by running out of money. The difference is that with a budget, you can deal with these matters when you are prepared to, and make choices about how you want to spend your money. Without budgeting, money problems can intrude on you at the worst times, and force which choices you make.
- Having planned rather than unplanned discussions about finances. This goes hand-in-hand with budgeting. Don’t wait until there’s a conflict before you talk to people in your household about money. Do it when passions aren’t running so high, so it feels like a plan rather than a problem.
- Taking care of asset allocation. Deciding how to allocate investments among asset classes (i.e., stocks, bonds, etc.) can be the greatest determinant of your risk and return. It’s not something you should be adjusting constantly, but you also can’t just leave it on autopilot, because conditions change. Too many asset allocation models are based on the assumption that past risk and return characteristics will repeat themselves in the future, but you simply can’t count on that. Take Treasury bonds for example. Thirty years ago, a 30-year Treasury bond was yielding more than 10 percent. Over the past thirty years, these bonds have averaged a yield of 6.9 percent. Today, those yields are down to 2.8 percent. That means these bonds are almost certain to earn a lower return going forward than in the past, and they are also more susceptible to adverse price fluctuations.
- Choosing financial products you can trust. Whatever financial products you use, you should review them once a year. Is your savings account interest rate still competitive? Do you have free checking, or has your bank slipped some new fees in on you? Have your mutual funds performed according to their prescribed investment styles? I find the investment products and services I’ve looked at carefully and can trust are ones I don’t have to think about much throughout the year. The ones I’m not so sure about bug me again and again.
- Getting retirement savings on track. Putting money in its place means allocating some of that money for the future. Instead of spending money as it comes in, think of yourself as needing to spread your spending out over your entire lifetime. That means saving enough to cover your spending when you are no longer earning as much money. Keep in mind that the average Social Security retirement benefit comes to only about $15, 000 a year; unless that’s sufficient to meet your needs, then you had better start setting some money aside for the future.
- Making your New Year’s resolution count. By all means then, make a New Year’s resolution this year. Just make it one that addresses one or more of the issues listed above. That way, you can take some actions in January that should set you on a course for a more happy and prosperous new year throughout 2013.
Putting money in its place not only means allocating resources wisely, but it also means dealing with the subject of money when you choose to, so it won’t intrude on your day-to-day life so often. Life is much more comfortable when money matters are kept in the background rather than the foreground.