10 Ideas to Get Your Financial House in Order For the New Year
Here are 10 ideas to get your financial house in order in the New Year.
Make sure your emergency fund is fully-funded - This is pretty common advice given by financial advisers, but so often we forget to set aside enough cash for emergencies (3 to 6 months of living expenses is usually the guideline) and end up having to go into debt on credit cards to cover an unexpected emergency, whether a job loss, car breakdown, home repair, uninsured medical / dental costs, etc. If you don't have the emergency fund at all or if you aren't at an amount you are comfortable with, now is the time to set aside some money to build that up! As I have written previously, don't be lured into thinking a home equity line of credit is an emergency fund - it's not! Here are some ideas where you might want to park that cash. I plan to update this research in the near future for 2020.
Increase your retirement savings - If you are contributing to your workplace 401(k), congratulations, that's a great start! If your employer matches your contributions, you always want to contribute at least that amount to take advantage of the "free money" available from your employer. After that, try increasing your contribution rate in small increments each year, maybe 1 percent at a time. I have found over the years that the money taken out of the paycheck is the best because it's out of sight and out of mind and there's no temptation to spend it. Some people advocate saving a portion of your raise each year by increasing your contribution rate. Eventually, you will get to the point where you contribute the annual maximum ($19,500 in 2020, plus an additional $6,500 if you are over age 50). You may also want to consider contributing to a non-deductible IRA even if you are participating in a 401(k) at work. I like contributing to a traditional IRA (nondeductible) and rolling over immediately into a Roth - this is called a "back door" Roth because it's a compliant way to circumvent the income limits imposed on a direct Roth contribution. As long as you keep the money in cash prior to roll-over there should be no tax hit and you get to enjoy appreciation, income and ultimately distributions tax free in the future from the Roth. IRA limits for 2020 are $6,000 ($7,000 if you are age 50 or older), unchanged from 2019.
Increase your taxable investing - Especially if you are maxing out your retirement savings at work and with your IRA, but even if you aren't, it's important to build your taxable investing portfolio. I really like buying stocks that pay a good, steady and growing dividend - "qualified" dividends also have a distinct tax advantage over "non-qualified" dividends and you pay a lower tax rate than on ordinary income. See some of my past ideas in Building a Strong Dividend Portfolio and More Dividend Investing Ideas. You can either opt to reinvest the dividends and buy more shares in the stocks, which will allow your investment to compound, or you can take the dividends in cash and reinvest them in money market for emergencies or to buy additional dividend stocks as the opportunities arise. I have also learned that you don't need to go crazy on diversification. A good portfolio can consist of maybe 5 or 10 different stocks as long as the selection criteria are appropriate (i.e., long history of steady and increasing dividends, strong business fundamentals and outlook, etc.). If the market tanks, don't panic and just hold and enjoy the dividend income stream that you have built. Use the extra cash you have built up to buy more of your favorite stocks at a bargain!
Build more passive income - In many ways this is related to #3 above. Dividend stock investing is an excellent way to build passive income, where you don't need to do anything other than setup the initial investment and you just collect the money every month or quarter. There are other ways to build passive income as well, which I laid out in this post. It's a good idea to have multiple streams of passive income. Some that I like are buying music royalties, owning investment real property, and self-publishing. It may not seem like much individually, but with multiple streams of passive income, the money can add up over time. Also, working on these "side hustles" can also be really engaging, fun and you can learn a lot about business and investing in the process. You might even become so successful that you don't need to work your day job anymore! Â
End the side hustles that are a lot of work and aren't making you any money - I have observed that often in the rush to make more money, people plunge themselves into multiple side hustles that are a lot of work and really aren't worth it. Usually, it's the ones that require a lot of your personal time like driving for Uber or Lyft, delivering for DoorDash or GrubHub or UberEats, and the list goes on. With the new year, do yourself a favor and look at these side hustles to see whether or not your time is being adequately rewarded. In particular, look at the after-tax income you are getting from all that work. If you are doing well, then by all means keep doing it. But if there's one or two things that you are doing that just aren't worth it, then quit and put your energy into something more productive that leverages your mind and not your personal labor. Â
Review your household budget for opportunities to save / cut expenses - This is an annual tradition in my house and actually happens more often than that, but the new year offers a great opportunity to review all your spending and look for places to cut back. I have found over the years that credit cards tend to be a big challenge, especially after the holidays and birthdays. Some tricks I have learned over the years include limiting the number of cards used, keeping them usage specific (i.e. one card used only for travel, one card for kids' stuff), using debit card for most of day to day spending on groceries, food etc., set up a monthly maximum budget per credit card and configure alert settings to let you know when you are getting close to that and of course, paying off the balance in full each month to avoid paying huge interest charges. Keeping your credit card balances low relative to your limits also really helps out your credit score, I have learned, which is really important when you are ready to buy a car or home.
Check your insurance to see if you can get same or better coverage for a lower price - A lot of insurance companies give you good discounts for "bundling" all your coverage together, including car, homeowners/renters, personal umbrella (which I highly recommend having), personal articles (i.e., wedding rings), etc. If you find yourself with multiple insurance companies, look at getting a quote from a few of the large insurers to see if there's any advantage to switching. Even if you can't bundle, it still makes sense to shop around for insurance and the new year provides an opportunity to do so, especially for car insurance. Â
If you are buying a car, buy a used one - A new car is nice, but as we all know, cars depreciate in value the minute you drive them off the lot. Why not use this to your advantage and buy instead a used car (maybe one that is only a few years old and in great condition just off of lease)? The savings can be substantial and the cars, especially the ones that are dealer certified, are like new and many still have warranty or extended warranty can be purchased for a relatively small amount. If you have to get a loan, pay it off as soon as you can. You'll be happy to enjoy at least a few years before your next car with no car payments!
Ask for a raise from your boss - If you are doing a great job and the job market is tight, and especially if your research shows that you are "under market," you should think about talking to your boss about a raise. You don't have to threaten them with "I'll be quitting if you don't give me a raise," but you can say "I have been checking the market and it looks like my pay is below market, could you please check into that and get back to me?" If you are branded as disloyal for doing that, you probably aren't working in the right place anyway. If you are doing a great job and they find you are underpaid, you might be getting a raise!
Update your estate plan - No one ever wants to think about this or talk about this, but we all have a limited amount of time here on earth and we never know how or when our time will be up. Only God knows that. Having a good estate plan prepared by a qualified attorney is really important, not only for you and ensuring your wishes are carried out after you are gone, but it also makes things easier for your grieving family to execute those wishes with less hassle. Revocable living trusts are typically used to hold all your assets and avoid the probate process, which can be expensive and also very time consuming to go through. If you don't have a will, the courts decide who gets your stuff. You don't want that, obviously. Also, things like having a durable power of attorney for if/when you are incapacitated and you need someone to make decisions for you and an advanced healthcare directive to help determine your healthcare wishes when you are unable to are also really important parts of a comprehensive estate plan.  Also take a fresh look at your life insurance and make sure you have enough to take care of your family should you pass. I prefer term life policies since they are cheap and do the job of covering you - often you have these available through your work benefits, but it's also good to have one outside of work just in case you lose your job. Term life policy premiums increase as you get older, but are still cheaper than whole life. Whole life policies have a high, but flat premium and part of the money grows (called "cash surrender value") over time and can be withdrawn tax free as a loan in retirement. Whole life policies might interest you for the retirement planning benefits. Take the new year opportunity to create or update your estate plan. You'll be glad you did! Â
I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020.
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