It’s a common trap to postpone sorting out your finances until “next year,” or until that elusive promotion is finally yours. Yet, as time passes, many find themselves stuck in a cycle of dreaming about financial freedom without taking actionable steps towards it.
With the dawn of 2020, it might be the ideal moment to stop making excuses and start making significant changes. This is more than just the start of a new year—it marks the beginning of a fresh decade.
But what steps are most beneficial? We consulted several financial advisors to gather insights on actions that can have a positive impact on your financial well-being in 2020 and beyond, and here’s what they recommend.
1. Boost your contributions to retirement accounts with tax advantages
Benjamin Brandt, a financial advisor and host of the podcast Retirement Starts Today, emphasizes the importance of reassessing your retirement savings at the start of the year. The IRS has raised the maximum contribution limit for 401(k) accounts to $19,500 in 2020, providing an opportunity to increase your savings.
“Could you spare a little more for your future self?” Brandt inquires. “Calculate how a 1% increase in your savings rate could look and make a commitment to that increase.”
Small adjustments to your savings can go unnoticed in your budget, but you won’t know the difference unless you try. (See also: 5 Financial Strategies to Consider Before Turning 40)
2. Review significant life changes from the past year
Financial planner Luis F. Rosa, who hosts the On My Way to Wealth podcast, highlights the necessity for individuals to reflect on significant life changes that may have occurred in the past couple of years, such as marriages, divorces, or welcoming a new child.
It’s also vital to update your beneficiary designations on retirement accounts, life insurance, and other financial products to align them with your current circumstances, he advises. (See also: 5 Financial Actions Every Single Parent Should Take)
3. Master the art of living within your means
Many people approach money management in a misguided way, prioritizing purchases and then saving whatever is left over. Christopher Clepp of Strategic Financial Group suggests a shift in mindset for those looking to change this pattern.
Rather than spending first and saving second, you should “plan for the lifestyle you desire and spend what’s left,” Clepp advises.
If you prioritize savings adequately, tracking every single expense becomes unnecessary, he states. “If your goal is to save 20% of your income each month, prioritize that savings first, and use the remaining funds freely, as long as you don’t breach your budget or incur credit card debt.”
4. Eliminate credit card debt
While credit card debt may seem manageable in the short term, it doesn’t provide any long-term benefits. With an average APR exceeding 17%, credit cards can quickly become a costly option for borrowing. They can easily develop into a habit that supports a lifestyle you can’t sustainably afford.
Clepp recommends making 2020 the year to conclusively tackle credit card debt. He points out that carrying an average of $5,000 in credit card debt from age 35 to 65 could incur nearly $20,000 in interest—an astonishing amount that could be better spent elsewhere.
5. Evaluate your insurance needs
Additionally, Clepp emphasizes the importance of reviewing your insurance requirements annually, even if you believe you are adequately covered.
“Unexpected accidents can overturn all that diligent planning,” he warns. Begin with a review of your home and auto insurance as well as any umbrella policies you may have.
Engage with an advisor who can clarify policy details for you. “Remember, cheaper isn’t always better; however, you might be able to find similar coverage at a more appealing price,” he suggests.
Also, reassess your life insurance if you have dependents or a spouse. Ensure your disability insurance provides the necessary protection as well.
6. Begin utilizing a budget
Financial planner Brandon Renfro, Ph.D., advocates for individuals to try their hand at budgeting and to review their budget comprehensively in the new year, even if they’ve had success previously.
“You might uncover minor expenses that can be eliminated,” he notes. “Often, it’s the smaller items that go unnoticed simply due to their size.”
By analyzing your budget and spending habits, you may uncover areas where you are overspending—potentially on non-essentials, including subscription services. Canceling unnecessary subscriptions could redirect those funds towards savings or debt repayment.
Renfro suggests that, in addition to budgeting, you should check the progress you’ve made towards your financial objectives.
“This involves more than confirming that you followed through with planned actions,” he clarifies. “You need to ensure these actions have genuinely moved you closer to achieving your financial targets.”
For instance, if you aimed to contribute an additional $100 monthly towards a loan or credit card, assess how much that’s brought you closer to settling the debt. If you’ve reached your target, that’s excellent—if not, reflect on why and take necessary steps to get back on track. (See also: 5 Keys to Effective Budgeting)
7. Focus on improving your credit score
R.J. Weiss, a financial planner at The Ways to Wealth, suggests that many people overlook monitoring their credit score, despite its importance in overall financial health.
“Many prioritize this only ahead of significant purchases like a home,” he notes. “However, it’s essential to regularly assess and improve your score due to the numerous advantages a high credit score brings.”
Weiss advises consumers to reduce their overall credit utilization ratio—the amount of revolving credit used against the total credit available. For instance, if you have a total credit limit of $10,000 and $5,000 in credit card debt, your utilization is 50%.
Aiming for a utilization ratio below 30% is a good benchmark, he states. You can achieve this by either paying down existing debt or increasing your total available credit.
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