Often when people set New Year’s resolutions, they’re ambitious but vague. For instance, a Fidelity survey found that the most common financial resolution Americans have this year is to save more, followed by the desire to spend less and pay off debt.
Clearly, these are great goals. However, if you’re serious about results, it’s imperative to go one step further and scope out your plan of attack. You already know this, of course, but actually sticking to it is a different story.
“Know thyself, so you don’t bite off more than you can chew,” says behavioral economist Hersh Shefrin. “Figure out where you want to go and structure the path in steps that are doable, so that you get where you want to go one doable step at a time.”
Often times you need to repeat these steps over and over, until they become powerful financial habits that help you achieve your financial goals.
Here are five money habits to develop this year in pursuit of smarter saving, spending and investing:
Automate, automate, automate. Think of this as a gimme that will free up your willpower for other things. Financial experts love recommending that you automate your savings because it’s so darn effective. Since you only have to make the decision to automate once, it’s hands off thereafter so you’re less likely to tinker with your contributions.
“If you set up a good practice around your financial resolution, it’s actually easier to keep because you don’t have to recommit each day like you do with exercise and diet,” says John Sweeney, who oversees retirement and investing strategies at Fidelity.
If you work for a company with a 401(k) or other retirement plan, you might have already agreed to send a chunk of each paycheck into savings. More than two thirds of large companies are automatically enrolling some or all of their employees in retirement plans, according to a Towers Watson study.
If you don’t have a 401(k) — perhaps because you freelance or work for a small business – you’ll have to go to the trouble of opening your own retirement account and scheduling automatic contributions. It’s worth it and you shouldn’t delay.
In addition to saving for retirement, automate contributions elsewhere, like into your children’s 529 college savings plan or savings account where you’re socking away money for a down payment.
Check up on your credit. Get into the habit of pulling your credit reports — you have one from each of the big three bureaus, TransUnion, Experian and Equifax EFX -0.99%. Under federal law, they’re free once per year at annualcreditreport.com, so request one every four months. You’ll want to check for inaccurate information (like an account that isn’t yours or a late payment you know you made on time). In addition to making sure you have the credit score you deserve, it’s a good way to double check that you haven’t been a victim of identity theft. If you do spot errors, make sure to dispute them right away.
Talk about your financial life. While it may seem taboo, you should get into the practice of letting others in on your money goals. That doesn’t mean blabbing (or worse complaining) about it constantly at work, the gym and the dinner table. But share with close friends and family members the goals you’re working toward and how you’re hoping to get there. They’ll help keep you accountable.
This even extends to the children. For instance, perhaps you and your spouse are trying to save for a family vacation. Explain to the kiddos that since you’re saving up, you will be eating at home a bit more for the next few months. “Children are often very good at reminding mom and dad ‘We aren’t going to do that because we’re saving,’” says Gretchen Cliburn, director at BKD Wealth Advisors.
Track expenses: There are very few people who will tell you they keep a close eye on their spending because it’s fun. Yet, monitoring expenses can help you get a better picture of where your money is going every month. Are you really spending $150 a month on Ubers? Did you forget to cancel that extra Spotify premium account? If you don’t like what you see, you might be motivated to do something about it.
There are a plethora of budgeting apps out there, including free options (like Mint and BillGuard) and paid ones (like You Need a Budget and HomeBudget).
Remind yourself of your financial priorities. Spending less and saving more can be particularly difficult when thought about in terms of what you’re denying yourself. Instead, frame it in terms of what you’re working toward that is more important than day-to-day spending. For instance, think about what the freedom of financial security will bring (like the ability to cover an emergency medical bill for your child). Does that trump your desire to spend freely on eating out, clothing and the like?
To this end, set specific sub-goals like contributing the maximum annual amount to your Roth IRA and remember it will take time to accomplish lofty plans. “You can have a car, a house, a college education fund for the kids and a secure retirement account,” says Stuart Ritter, financial planner at T. Rowe Price. “But it takes time. You have to recognize that it takes patience and consistency.”
After all, no one saved $1 million, says Ritter. They saved a portion of each paycheck for years until they got there.
– Lauren Gensler for Forbes.com