Dollars & Sense: A Financial Resolution Reality Check

If you’ve already abandoned 2007 goals, you may need to rethink your strategy If you are struggling with newly minted 2007 resolutions to spend less, save more and manage money effectively — or worse yet, a few months into the new year, you’ve already given up trying to achieve them — it may be time for a course correction and a reality check. Financial resolutions, like other decisions to lose weight, give up unhealthy habits or achieve an important life goal, need more than good intentions to ensure that they don’t fall by the wayside before the year hits the halfway mark.

Most people’s financial resolutions have similar themes:

• I want to save money for ___ (insert one or more important goals).

• I need to get out of debt so I have money for the things I need to do in my life.

• I’d like to protect what I’ve already accumulated so I won’t worry about losing it.

Although those goals are worthwhile and well-intentioned, they often stay too high-level, too fuzzy or too unrealistic to get traction in the real world. A lack of clarity, specificity and priority bogs down otherwise achievable goals and prevents them from being converted into concrete action, say leading financial experts, who fret that few people take the time for adequate financial goal-setting and planning.

Instead of the annual rite of making financial resolutions that are vague, unfocused and likely to be abandoned, they argue, a more systematic approach to financial planning is in order. Thoughtful planning that considers the short-term (up to one year), intermediate- term (one to three years) and longterm (more than three years) goals can move you toward your ultimate financial objectives. Get started by spending some time mapping out a financial destination for yourself and your family that takes into consideration current circumstances, financial obligations and income; identified future needs, such as college for children or a bigger home; retirement expectations and plans; and all of those large and small dreams that will make life sweet for you.

• Short-term goals can be accomplished quickly — in a few weeks or months, but no longer than a year.
Examples: Begin an investment program or take a modest vacation.

• Intermediate-term goals can be accomplished in one to three years.
Examples: Eliminate all credit card debt or buy a new car.

• Long-term goals can be accomplished in three years or longer.
Examples: Buy a home or fund a retirement account.

Goals should reflect your values and those of family members or others who participate in them. Because they are based on what is most important to you personally, your goals will be unique — not necessarily those of your friends, family members or colleagues. You are most likely to achieve your goals if you make them:

An aggressive, unreachable goal can frustrate you. If you can’t save $350 each month for the European vacation you dream of, for example, set a more realistic goal to save $200 or even $150.

Clarify your goal with a precise and detailed description, and write it down. An example: “I will pay off my Visa card balance by December 2007 by paying $XX each month.”

Readjust your goals when life hands you a setback. If your income or expenses change, you may need to modify goals temporarily to accommodate to new circumstances, but avoid the temptation to give up or find a shortcut that puts you in debt.

Once you spell out your goals, keep them front-and-center. They will be your inspiration to stay on task and on track financially. Review them periodically to measure your progress and to ensure they still make sense for you.

Even with goals that are concrete, focused, flexible and relevant to your needs, you could make costly mistakes if you don’t prioritize them in ways that make financial sense. Goals inevitably compete for resources — your need to save for your child’s college education and save for your own retirement, for example, are likely to overlap. Both are valid goals, both are critical to longterm objectives, and both need dedicated resources. What’s a success-oriented goal-setter to do? The financial experts suggest you tackle goals in this priority:

Pay off debt first.
Most personal finance advisers are adamant about this one. High-cost, nondeductible consumer debt, particularly credit cards, should be paid off first, even before funding retirement and college savings accounts. There is one simple reason: Paying off a credit card charging you 18-percent interest, for example, is like earning a tax-free, risk-free 18-percent rate of return. And you free up resources that you can use to pursue aspirational goals. There are at least two effective strategies for paying off credit: The most costeffective is to pay off the highest interest rate loans and credit cards first. As an alternative, some people prefer to pay off the smallest balances first and apply the freedup cash to larger balances as a way to see results faster.

Save for emergencies.
Once you have paid off consumer debt (many experts advise that you do this while you pay those debts off), establish an emergency savings fund. A plan for the unexpected, an emergency fund cushions you against the financial chaos that you might experience if an unexpected illness, disability or other crisis keeps you from earning income or puts an unusually large financial burden on your shoulders. Simply put, the fund is a protective measure against going into debt for basic living expenses if you suddenly lose income or add expenses.

Traditional wisdom suggests that the fund should be equal to at least four to six months of your fundamental living expenses, enough to cover necessities and pay ongoing monthly obligations. Make sure that these funds are located in a separate, safe and liquid account, such as an interest-bearing savings account or money market fund account.

Accumulate funds for retirement, then save for college.
Pushing retirement saving ahead of college saving seems to fly in the face of parental inclinations, but the experts say there is solid financial reasoning behind this one. Plenty of options exist for funding college costs — low-cost student loans, scholarships, grants and other alternatives — but funding retirement results only from long-term saving and investing. There are no loans, scholarships or grants for retirement.

As a minimum, fund your 401(k) plan, if your company offers one, at least up to the maximum your company will match; that is free money. The goal is to save at least 15 percent of income for retirement, most advisers say. Even if 15 percent is a stretch right now, work toward that goal by increasing the percentage each year. If you are on track to fund your 401(k) plan, IRA or other retirement account to meet your future needs, then you should consider college savings options such as after-tax contributions to a state-sponsored 529 plan or other investment or savings vehicles.

Buy insurance.
Thinking about insurance may not be as interesting as deciding how to spend money or saving and investing, but it will get your attention if you ever watch your wrecked vehicle being towed away after an accident or sift through the charred remains of your home searching for anything you can recognize as your belongings.
Insurance is not a luxury; it is a necessity. In fact, having adequate insurance is just good financial management in the same way a budget, an emergency fund or an investment account is. Review your auto, property and life insurance policies each year. If your life has changed in some way, the chances are good that your policies may need to change as well. Look at policies to ensure that you still need them, that they are still adequate and that they continue to represent the quality and value you expected when you purchased them. Then, look into the benefits of long-term care insurance, which pays for nursing home, assisted living or home health care.

Create or update an estate plan.
Whether your estate is modest or large, you will need to make sure your will and other legal documents, such as a durable power of attorney and a health-care power of attorney, are in place and up-to-date. Like insurance policies, these documents should be reviewed periodically — at least once a year — to make sure they still reflect your wishes and any life changes that could affect how you want your affairs handled or who the beneficiaries of your assets are.


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