What do you want to do? Lose weight? Learn a second language? Get in shape? Take a vacation? Get out of debt?
What better time to commit yourself to a new course of action in life than at the end of the year? More than 40 percent of Americans “usually” make New Year’s resolutions. Another 17 percent make resolutions “infrequently.”
Losing weight and eating healthy took the top spot of resolutions in 2017, at 21.4 percent. Next up: making self-improvements, 12.3 percent. Third place goes to making better financial decisions: 8.5 percent. Nearly 10 percent of people who make resolutions are successful. Surveys show that more than 42 percent of people always fail at keeping their resolutions.
No Plan, Know Pain
How about financial preparedness in general? One-third of Americans have no financial plans. And nearly 60 percent of Americans believe their financial plans need improvement.
The months leading up to the New Year provide the ideal opportunity to either develop a financial plan or improve an existing one. After all, the New Year sets the stage for the tax season and for changes in financial requirements.
Looking at budgets of the average American household:
The average income in 2016 was $74,664. Expenditures on average were $57,311. That left $17,353 in spending money.
One-third of housing costs went to paying for rent or mortgage.
About 56 percent of food budgets go for groceries and 44 percent for eating out.
The average household spends 40 percent of transportation costs on vehicles (which may include making loan payments), 21 percent for gas and oil, and 32 percent on other costs, such as repairs. More than two-thirds of health care costs cover insurance.
Understanding the Importance of Budgets
Creating a household budget allows you to track expenses and adjust your spending. Budgets give you the ability to pursue your financial goals according to the timeline you establish.
Budgets may also help you avoid or mitigate the impact of large, unanticipated expenses.
All of those are good reasons for creating a budget; yet, only one in three Americans prepare or adhere to detailed budgets. Budgets also enable you to plan your life more effectively to avoid living paycheck to paycheck, which makes you more susceptible to financial setbacks.
Research shows that more than a quarter of U.S. workers live paycheck to paycheck. More than 70 percent of workers said they are in debt, and 56 percent say they expect to remain in debt.
Are bigger paychecks the answer? Not really. While more income pushes the percentages down slightly, higher earners still make the same mistakes and suffer the same consequences. Nearly one in 10 workers making $100,000 or more say they live paycheck to paycheck, and almost 60 percent of them are in debt, according to research by CareerBuilder. The percentages rise as income levels decline.
Here’s How a Budget Can Help You
A budget keeps your goals within sight. Your goal may be paying off debt, going on a special vacation or making a down payment on a house. But, without a financial plan to pursue your goals, you’re just wishing and hoping.
It restrains your spending tendencies. A budget will highlight financial habits and patterns that may be working against your goals. A budget provides you with a clear picture of your income and outgo.
It helps spotlight your bad habits. This point is worth repeating. A budget will show you where you’re going astray. Do you really need to go to that expensive restaurant with your work buddies every day at lunch? Do you really need 700 satellite channels, especially when you only watch four of them?
It helps you sleep better. Really! Without a budget, you may find yourself in an unexpected financial situation where you suddenly can’t pay a particular bill. That causes stress and sleepless nights. A budget allows you to see all your upcoming expenditures at a glance, prioritize payments and reduce surprises. That’s good for sound snoozing.
It helps pave the way for pursuing a golden retirement. Designating a percentage of your income to a retirement account, such as an IRA, 401(k), or other fund, may help you avoid significant financial shortfalls later in life.
It helps you brace for those inevitable emergencies. Life happens. Sickness, injuries, divorces, deaths of loved ones or other tragedies can derail the rosiest of financial dreams. Setting aside as little as $10 or $20 a week for emergencies can build a sizeable emergency fund more quickly than you think.
What exactly should you do to prepare for 2019?
First, determine what you want to do.
Set a goal. Your first one could be as simple as paying off a high interest credit card, building that emergency fund by designating $15 a week to a savings account, or establishing a retirement savings account.
Next, prioritize. Which bills or debts do you want to pay first? Target those credit cards that have the highest interest rates. Do the math. If you owe $20,000 on a credit card with a 19 percent interest rate, you’ll be paying $3,800 in interest by the end of the year (and you’ll do it again next year if you maintain that balance). The same amount of money in a bank certificate of deposit at a 4 percent rate will pay you $800. The difference is an outgo of $3,000. Your best bet for the long haul just may be eliminating that high interest credit card first.
Open an Individual Retirement Account (IRA) and start making contributions. A financial professional may be able to help you decide the best type of retirement account to suit your needs.
Close those extra accounts. We’re talking about the ones you don’t use. Do you really need to have all those bank and credit card accounts? Many charge fees. Keep only the ones you use.
Start making plans now for a happy and rewarding New Year. May 2019 be your best year ever! FBN
By James D. Hoyt, CPWA, CFS
James D. Hoyt is a Certified Private Wealth Advisor, Certified Fund Specialist and the Founder/CEO of Ascendant Financial Solutions, Inc. Securities offered through Geneos Wealth Management, Inc. Member FINRA/SIPC. Advisory services offered through Ascendant Financial Solutions and Geneos Wealth Management, Inc. All investing and investment strategies involve risk including the possible loss of principal. Investment strategies cannot ensure a profit or protect against loss in a declining market.
