New Years Resolution Guide to: Financial Health
Well, it’s that time of the year again. You’re feeling the holiday hangover from all the food you ate and all the alcohol you had to consume to deal with your family. Now you’re starting to wonder if spending all your money on presents was worth it. Spolier alert: it wasn’t. But, it’s a new year, and you’re hoping to turn a new leaf in your financial life. New Year’s resolutions are a little controversial. People either love them or hate them, and no matter where you stand on them, they rarely get acheived. But we are optimists damn it, and there’s no time like the present. So, we will break down some financial goals, and even some action plans that you can take to get there. One of my favorite quotes is:
A goal without a plan is just a wish – Antoine de Saint-Exupéry
So, let’s not make this a wish. Set a goal, make a plan, and take some action to get your money right.
First off, if you are setting a New Year’s resolution, we need to lay some framework. You need to set concete goals, not subjective ones. For instance: “I want to save more money.” is trash and should be replaced with “I want to save $5,000.” Another important step in goal setting is writing your goal down. A study showed that when people wrote their goals down, they were 33% more likely to acheive that goal. You want to be in that 33%. Next, you need to make the plan to reach the goal. Break down the large goal into smaller goals that will get you closer to the big one. Then continue to break the smaller goals down once or twice until you have a weekly goal. Now that you have a weekly goal, set an action plan in place to reach the weekly goal, that will help you tackle the monthly goal, which will give you progress toward the end goal. Finally, set up some accountability. Telling someone else your goal, and having them check in with you, and you check in with them about how you are doing toward your goal can be incredibly motivating.
Goal #1: $1,000
A study back in 2015 showed that a majority of Americans would not be able to pay for an unplanned emergency expense of $1,000. All it would take is a health issue, an unexpected car repair, a home repair, a family emergency causing unexpected travel, and a number of other relatively small things to cause the average family to not only squander what little savings they have, but potentially go into debt to fix the situation. Hell, just last week we had someone at work forego medical care because their car was in the shop. This is going to happen more often now that deductibles are starting over with the new year. Seriously, skipping out on medical treatment because you don’t have the financial means is a big issue. Why the hell our medical care costs so damn much is another article entirely, but while we have to survive within this system, Americans should have enough money to cover their deductibles. Now, if you are one of the millions of Americans that fall into this category, you’re going to need to understand that your current level of spending and lifestyle habits are what got you in this situation in the first place. Once you know you need to make some serious changes about your money management, then everything else becomes easier.
Onto the goal setting process. Write your goal down, break it into a smaller goal, start working out a plan to reach that goal, and then tell someone your goal and ask them to hold you accountable. To break your goal of $1,000 down, you can say that saving $400 a month will get you to $1,000 in under 3 months. Now for the plan: take a good hard look at your spending, and seeing what line items can be cut back, or eliminated altogether. Just by cutting your cell phone bill, quitting eating out, and cutting your grocery bill, you should be at a cool grand in no time. The average individual’s phone bill is $71. With Mint Mobile you can find plans for unlimited talk, text, and 2 GB of data for $15. Leaving you with a savings of $56 a month. $232 per month is the average amount spent eating meals outside the home. We suggest getting better at cooking, which is free, along with being smarter about your grocery shopping and cut your eating out budget by 100% at least until you have some savings. Onto the topic of grocery shopping, apparently the average grocery bill for one person is an astounding $250 a month. Our friend Justin over at Saving Sherpa spends $70 a month on groceries. Even if you suck at grocery shopping, Aldi and a diet will get that down to a reasonable level, so let’s assume $150 in savings. By implementing these things, you
could should have $1,000 saved up in a little over 2 months. If you maintain these savings habits, you will give yourself a little financial cushion and you’ll almost have enough to max out an IRA for the year.
Goal #2 Set Up Retirement Accounts
Speaking of IRA’s, another priority this year should be to get your retirement savings on track. One of the easiest ways to save any amount of money is to make the saving automatic, and somewhere that you don’t have easy access to. By upping your 401k contribution, this money you never see roll into your bank account will begin working for you and securing yourself a better financial position for the future. 66% of millennials between age 21 and 32 have nothing saved for retirement. Nothing. Zilch. Nada. We don’t mean to put anybody down, but damn ya’ll. We’ve got time on our side, which isn’t meant to convince you to wait on investing, but to invest more, sooner. Most people in their 20’s will have 40 years for their contributions to accumulate interest. Here’s a fancy little graph to illustrate what we mean.
Each person in this graph is putting at least $300 a month in contributions to their 401k, but the 40-year-old, sensing he doesn’t have as much time to save for retirement doubles his investments to $600. Even if you start saving double once you hit 40, you won’t catch up by retirement age. That 15 years makes a huge difference. At a minimum you should be contributing to receive your employer match. But we’d like to throw down a challenge to max out your 401k. The contribution limit is going up this year to $19,000, which works out to $1,583 per month. Obviously, if you’re contributing to a traditional 401k, these dollars are all pre-tax, but what does that mean for your paycheck specifically?
As you can see from my fancy math skills, there is a big difference between these levels of contribution. So the first column represents zero contributions to a 401k plan, and while it has the most pay, it also has zero savings. Second column of 5% which nets you $3,500 in 401k contributions also saves you $420 in taxes. Now, there’s quite a leap to the third column of a 28% contribution (28.461538 to be exact, but who’s counting). That’ll have you meeting the 2018 max and will have you paying the least amount in taxes. Again, contribution limits go up to $19,000, but the tax calculator I found wasn’t updated for 2019, so here we are. With $18,500 in contributions, and your tax savings, you saved $20,720, but your net pay was only $15,466 less than the 0% contribution.
Let’s say that you aren’t as interested in retiring early as we are, that’s okay. But, let’s say you buckled down for two years pretty early in your career and maxed out your 401k, then after that two years, you dropped back to get the match at a 5% contribution rate with a return of 7%. In 30 years, you would have a whopping $819,496. If you only contributed the 5% from the start you’d have a little over $661k. Over $158,000 difference in retirement savings from just two years of ramping up contributions.
Now that we’ve beat you to death on why you should be contributing to a 401k, let’s go through the goal setting process. It’s much easier this time, because all you have to do is reach out to your HR department, or hop on your company website in our case, and crank up your contributions. Since the savings is automatic, the goal setting process and planning then gets pushed down stream to the other aspects of your life to see what you
can should have and afford. The new car becomes unreasonable because it would eliminate your vacation and entertainment budget, “upgrading” your house becomes unrealistic and you realize that you and your family are just fine where you are. You begin to realize that all of the things you think you “need” to survive aren’t as important, and you can be just as happy (if not happier) without these things and a hefty amount in savings.
Whether your goal is to save $1,000 or to save $100,000 we are sure that if you set some goals, break those down into smaller challenging, but still acheivable goals, and make an action plan, this year could just be the year that you stick to your New Year’s resolution, and make 2019 your bitch.
Sometimes I think that minimalism is the best introduction to achieving a high savings rate, even better than showing someone the end benefit in the form of retirement savings balance growth. Until someone realizes how happy they can be with few and low spending, it will be hard to sell them on spending a low percentage of their take-home. This, then, raises the point that we try to avoid in the FI community, which is the great importance of having a natural inclination to hi savings and low spending if we are going to achieve FI success. The reason that’s an ugly truth is most readers will never achieve the goals you’ve laid out in this article simply because they are not natural savers. But I will say that differently. They are not natural minimalists. I think you and all of the other FI bloggers genuinely want to appeal to everyone, but ultimately most of the success stories will be natural minimalists for whom you have removed the curtain.