The following is a guest post from Todd Tresidder who writes regularly about advanced personal finance topics and investment strategy at Financial Mentor.
Every year it’s the same charade – New Year’s resolutions you don’t keep.
Unfortunately, when your resolutions are designed to improve your financial situation, then failure is expensive.
If your goal is to produce results then try a different approach…
Don’t just “resolve” to improve your financial situation. Instead, take it one step further by implementing a few simple tweaks so that you actually get the results you want.
This isn’t about working harder: it’s about working a smarter process by formulating clear plans with action steps that convert your goals into reality.
Below we’ll look at three common financial resolutions for the New Year and provide simple changes you can implement so that you can improve your financial situation…
Resolution #1: I’ll Save More Money This Year.
How to tweak it: I’ll create a realistic plan to save more money.
Saving money doesn’t just happen: you must make it happen.
You need a road map to saving money. There must be a plan attached to your intentions with specific action steps along the way. This plan must provide a clear understanding of how to get from point A to point B. Without clearly defined actions steps that connect the two points you won’t navigate the journey successfully.
That is why budgets fail: they try to enforce discipline through accountability but they lack a meaningful plan to change the underlying cause of the problem. Failure to save money is primarily a problem of your “wants” exceeding your income. Accountability through budgeting won’t solve that.
Budgets essentially tell you to spend less, but that is like telling an obese person to eat less so they can lose weight. Duh! It solves nothing. You already know how to save money. The problem isn’t knowing what to do: the problem is knowing how to get it done.
Always remember that every resolution (including the resolution to save more money) must always include a plan that provides an actionable way to achieve the goal. Intentions are good but not sufficient. Purposeful action based on a plan following sound principles is required. More on that below…
Resolution #2: I’ll Hire a Professional Financial Adviser.
How to tweak it: I only pay for services that add value in excess of costs.
Too many investors make the mistake of paying high investment expenses without understanding the true costs.
Hiring a professional adviser may sound like a smart resolution for the New Year, but only if it puts more money in your account than it takes out.
Many advisers charge a percent of assets management fee while also recommending investment in high-cost mutual funds with additional management fees in excess of 1%. Over a period of 20 years these fees can compound to cut the value of your portfolio in half when compared to low cost providers. It’s a serious problem.
Instead of blindly paying for services consider first the cost-benefit equation. Make sure the service is adding to your savings and not taking away instead. For instance, if you pay a broker or manager 1% then that person should add value to your portfolio by more than 1% per year when compared to low-cost or no-cost alternatives.
Surprisingly, the research is clear that 80% (or more depending on the study) of high cost mutual funds underperform their passive indexed brethren. Similarly, it is extremely rare for an individual adviser’s fund or stock selections to add more value than his fees subtract. The reason is well documented: high expenses are a tough hurdle to clear over the long run.
What that means is your New Year’s resolutions should always be based on sound principles otherwise they’re not worth achieving. Hiring an expert may sound smart at first glance, but the correct principle is to make sure they add more value to your portfolio than they take away.
Don’t make resolutions that could cost you more than they are worth.
Resolution #3: I’ll Open An IRA To Save For Retirement.
How to tweak it: I’ll create a realistic plan for my retirement financial security.
Opening an IRA is an action step – not a plan.
The starting point to a secure retirement is figuring out how much money you need to retire. A study by Employee Benefit Research Institute found that people who estimate their retirement needs take improved actions to produce greater results. In short, those who estimate their needs are more successful at retirement planning than those who don’t.
Put the odds in your favor by using a retirement planning calculator to create your “best-guess” estimate. Don’t worry about perfecting your estimate at this time. The goal is to just point the general direction so you can begin formulating plans. That is good enough.
The second step in planning your retirement is to reverse engineer the savings process by creating actionable goals. For example, if you need $400,000 to retire and you have 20 years to get there then a worthwhile savings goal is $20,000 per year or $1,670 per month (investment returns are ignored in this estimate because the compounding period is short and returns are largely offset by inflation anyway).
The principle is to break your elephant sized long-term goals down to bite-sized monthly chunks so that the objective feels realistically attainable and results can be measured. It is no longer pie-in-the-sky. It is a manageable objective in a manageable amount of time to produce a measurable result. You will know each and every month if you are on track rather than waiting for 20 years when it is too late to solve the problem. You will get monthly feedback helping you correct course until you actually reach your goal.
The key point is you need a realistic objective measured over a realistic time period to produce actionable results. When a goal is too big it is amorphous and difficult to work toward. Break your big New Year’s resolutions into bite-sized chunks so you can take action.
A Toast… to Your Financial Success
In summary, New Year’s resolutions usually produce little result because they are nothing more than a wish. A goal without a plan is just a dream.
This year, give your resolutions staying power by making realistic plans to actually succeed. If the goal is worth reaching then it is worth formulating a plan to achieve it. Make sure these plans are based on proven success principles and involve concrete action steps that you can measure and account for so that you actually win.
As you ring in the New Year, commit to making positive progress on your financial plans. With the few simple tweaks outlined above, you can more easily keep your financial goals top of mind so that you enjoy a successful 2012… and beyond.
Good Advice! Just take those first few baby steps!!
Posted by: Steve Mertz | January 04, 2012 at 01:28 PM
One of my resolutions is to stop giving insurance companies my whole paycheck. I feel that's reasonable. Been shopping around for the past couple months and even though my car is brand new it is amazing how different rates can be at different companies.
Posted by: Brian Scott | January 04, 2012 at 03:47 PM