As January has rolled around once again, many will be making New Year’s resolutions. Studies have shown that 62% of Americans will make New Year’s resolutions, although only 8% actually achieve them! Resolutions related to personal finance are the third most popular type made (behind self improvement and weight loss).
I’m not one who makes resolutions, probably because I wasn’t in the 8% very often! But clearly many people are making them, and many relate to personal finance.
Harmful Financial New Year’s Resolutions
While setting financial goals is a good thing, are all resolutions equally good? Could some well-intended resolutions end up being detrimental to your financial health? Let’s take a look at seven potentially dangerous financial New Year’s resolutions, and better alternatives.
1. I will make a ____% return on my investments this year.
This sounds innocent enough and, on the surface, a reasonable goal. The problem is that we don’t control the market! Whether it goes up or down, we have nothing to do with it. When the market doesn’t cooperate with your stated goal, many investors will begin to search for higher returning investments. Unfortunately, higher return also means higher risk. Perhaps so much risk that you won’t stay invested if a market downturn continues. Chasing returns is a loser’s game. Don’t play it. Understand your personal risk tolerance and invest accordingly.
A better idea: Instead of trying to meet an arbitrary return goal, try to match the returns in the market this year by being well diversified and minimizing fees and taxes.
2. I will invest in _______ since Person XX (my neighbor, co-worker, brother-in-law) has been so successful with it.
It is human nature to see someone else’s success and want a little of it for ourselves. But that doesn’t make it a good idea!
For example, I often see people who have been successful with rental property. As a CPA, I can run the numbers and see the obvious tax benefits of building a portfolio of rental properties. But my personality is not well aligned with what is needed for investment property success. I have had some commercial rental property experience in the past, and while it was financially successful, it was a big headache and a source of worry. For me, investing in REITs makes a lot more sense.
A better idea: Create resolutions based on your strengths and specific goals, not what has worked for someone else.
3. I will max out my 401k in company stock.
No matter how well your employer’s stock may be performing, I believe investing in your company stock is a mistake. You have enough tied up with one company when they are your employer, you don’t need to have your investments tied up with them, too.
Diversification across all company sizes (large, mid-size and small companies), countries, and asset classes (stocks, bonds, REITs, etc.) will reduce your risk.
A better idea: “I will max out my 401k in a well diversified, low cost portfolio.”
4. I will “save more” or “spend less” or “invest more”.
Resolutions like these sound good, but are far too general in nature to be effective. If you save an extra $5 in one month, are you done for the year? If you cut your latte habit to four a week instead of five, have you cut your spending enough to meet your goal?
A better idea: Try more specific goals: “I will increase my 401k withholding 1% every quarter this year.” Or one I really like, “I will increase my 401k contributions by 50% of any pay increases this year.”
5. I will prepare a monthly budget in January that I’ll follow every month.
If you’ve spent any time on this site, you’ll know I am a big advocate of preparing a budget or spending plan. So what’s not to like about this resolution?
To be effective, budgets need to be prepared monthly. Yes, some items will be the same each month (like rent, or your monthly car insurance premium). But many things change throughout the year. No single month’s budget fits every month. Trying to make one “master budget” to use all year will lead to frustration (and probably stopping budgeting altogether) as the spending doesn’t fit.
A better idea: Commit to preparing a spending plan every month, before the month begins. Make it specific to the needs of that month.
6. I will prepare a budget every month to bring our household spending under control.
Notice the “I” and “our” in this resolution. Effective budgeting should be a joint effort. Both spouses should participate and contribute to the budget preparation process. Using the budget as a hammer to try and force your spouse to change their behavior will almost certainly fail……and will cause a lot of heartache in the process!
A better idea: Strengthen your relationship by working together on your finances. Something like, “We will work together to prepare our monthly spending plan before the month begins,” will be much more effective. And you’ll be drawn closer to each other as you work together to meet goals important to each partner.
7. I will purchase a new car (or another high ticket item) this year since interest rates are so low.
New cars are awesome. That new car smell. All the gadgets work (and you have a warranty if they don’t). No stains. No french fries under the seat.
You’ll get no argument from me that new cars are fun to drive, but they are not as fun to pay for. The average new car loan is now $644 per month, with a term of 67 months. Ouch. Even if the interest rate is zero, you’ve already committed a sizable portion of your budget – for the next 5 ½ years – on a vehicle going down in value every month. Where could you invest that money instead…..and what would it be worth in 67 months? Probably a lot more than a 5 year old car.
This same principle holds for other items for which you’d borrow money. Forget the interest rate…..just stop borrowing money! Remember, the borrower is slave to the lender (Proverbs 22:7). Financial freedom is a lot more enjoyable.
A better idea: Instead of borrowing money for a purchase, commit to saving the cash needed to pay for it in full. Better a paid-for used car/truck/boat/camper than a new one that comes with a payment book!
Setting measurable and well defined goals to meet your objectives is always a good idea, whether it’s January 1st or not. Just make sure that the financial New Year’s resolutions you make are ones that will further your progress towards your personal goals and not lead you in the wrong direction!