Make a Financial Management New Year's Resolution that Really Counts
If you are pondering whether and what New Year's resolutions to make for 2013, here are three ideas for quick and easy small steps you can take to improve your daily financial management.
1. Automate as many routine transactions as possible.
Automated transactions for both deposits and expenses liberate you from daily hassles. If you are traveling or become incapacitated, automated transactions make financial management easier and safer, and you won’t have to worry about how the mail might be stacking up back home.
If you are older and nearing the time when your children might be helping you with daily finances, having everything automated would be a valuable gift to them as well as a good safety net for you.
If you are young and/or travel a lot, why not let go of the hassle of manual payment? You can always review detailed account data online or on the monthly account statement.
Automating financial transactions doesn't mean losing control—instead it keeps you at the managerial, not administrative, level with respect to financial management. Don't have any automated transactions? Set up one to see how it works and then gradually add as many others as possible.
Hint: You can automate bill payment via your credit card or checking account. Using the credit card gives you frequent flyer miles but requires periodic updating to refresh the expiration date for each vendor. Using the checking account to automate bill payment finesses the expiration date issue but does not give frequent flyer miles.
Home Run: Arrange to have automated expenses fly out of your account a day or two after regular deposits are scheduled to arrive each month. Pushed to perfection, this structure for your daily accounts creates very powerful information with no personal effort: the cash remaining in your check book each month becomes an ever more accurate reflection of cash available for discretionary spending. Knowing how much you need and also are able to spend each month is empowering; you know where you stand financially.
2. Get some cash reserves in place.
Having some extra cash around is helpful and tremendously reassuring, especially in an economy with shifting career opportunities and tax law uncertainty for both you and those close to you. Don't have any reserves? Set up a small regular transfer to a savings account and start growing one. Increase the transfer amount every time you get a raise and bump up the reserve account with a small portion of every bonus and cash birthday gift. Your reserve will build like a snowball—and set you up for financial success.
Hint: Don't worry about the low interest rate on the reserve account. As your wealth grows, the reserve account becomes a smaller and smaller fraction of overall wealth, making the impact of a low interest rate less and less pressing. More importantly, remember the goal of reserves: to stand at the ready to be available to you on short notice with no penalty in the event of a sudden personal need or opportunity. Higher returning investments can't offer fast, easy access to cash without possible loss of principal. With ample reserves in place, you can more safely take on investment risk in the long-term portfolio. Long-term portfolios grow better without being hampered by the additional goal of also providing near-term liquidity.
Home Run: You have a "false-bottom" in your checking account as a first layer of reserves. If your balance goes below this targeted amount, you will know you've hit the zero amount—but you aren't in danger of bouncing checks. You also have a distinct separate account holding ample emergency reserves, typically three to six months of income at least, with possibly higher amounts depending on your particular financial circumstances. Because of these reserves you feel calmer, safer, and more in control of your finances.
3. Check your overhead.
Make a list and total up each of your must-do expenses and compare the total to your net after-tax income. Are you surprised by how much of your income is already spent? Does the data prompt you to rethink daily financial habits? Is there room to increase an automated transaction that enhances progress towards a highly valued goal, e.g. rapid payment of debt or building reserves or portfolio wealth?
Hint: Net after-tax income is typically your net paycheck if you have arranged for income tax withholding to be a fairly accurate pay-as-you-go amount.
Home Run: You know how much you can spend each month on discretionary spending and you have found the right balance at this stage of your life between high fixed expenses and ample cash for discretionary spending. You understand how and why it is that people who live in small houses might take big vacations.
These three possibilities for your 2013 New Year's resolutions are likely to be easier and more effective than the usual "eat less, exercise more" syndrome that sends most people right to the refrigerator. This year make a resolution that actually works!