Time to Go on a Financial Diet? Get Your Finances in Great Shape

New Year, new you, right? My friends have the same New Year’s resolutions each year, and they typically involve dieting. As a wealth adviser, I get a lot of questions from clients and even friends about how to cut the fat, add bulk and get their New Year’s finances started off on the right direction.

For this year, I’m recommending a financial diet with three stages – we detox by paying off our new debt, follow it up by adding in some new healthy financial habits and cap it off with a regular workout.

Stage 1: The Quick Detox

Pay off your holiday bills ASAP. Start this stage of your plan by paying off all of those holiday bills that come due in January. We know people tend to spend extra during the holidays to buy gifts, so figure out where your real starting point is by keeping up and paying off those bills. The goal is to reset your new year without any lingering bills hanging over you.

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If you are unable to pay off those bills immediately, come up with a realistic plan. For example, a person owing $1,000 may pay $300 per month and have this debt paid off by April. If you have a bonus coming soon, it may also make sense to allot some of those funds to pay down holiday debt.

Develop a budget – but don’t go cold turkey. Understand how much money is needed to cover basic costs – mortgage, car payments, child care, food and gas. Once you understand how much is needed to cover everyday costs, it is easier to save and plan ahead.

I also like to look at the credit card statement at the end of the year to simply review how I spent my funds. Online shopping could cause people to be spend more than they realize, as it is so easy with a 1-2-3 click.

So, in addition to looking at your spending, see how much of that was impulse online purchases that perhaps weren’t necessary. Or did you overspend at the holidays to make up for not being able to see your loved ones in person? It is OK if you do not make it an annual tradition going forward.

I realize setting up a budget is not a lot of fun, and for some people, saving money will not feel good. However, it will help identify categories where you can reduce your spending, make adjustments and ensure you aren’t faced with this situation in 2022.

Stage 2: Develop Healthy Saving Habits

Contribute the maximum amount to a retirement plan. This one can be easier than you think. By saving a percentage of your paycheck, you never see the amount that gets saved hit your bank account. It is not there to burn a hole in your pocket to spend.

Your goal should be to contribute the maximum to your 401(k) each year, which for 2022 is $20,500. If you are 50 or older, you can contribute an additional $6,500 as a catch-up contribution. But if you are still working up to that savings target, a good practice is to incrementally increase your 401(k) contribution percentage every few months to make sure your budget can absorb the higher savings. You also can put any raise received into your 401(k) as well.

Contribute to your health savings account. For people with a high-deductible medical plan, if you did not do this during open enrollment you still have the option to contribute throughout the year directly to a health savings account. You can do this even if you didn’t set up automatic payroll contributions to a Health Savings Account during your company’s open enrollment period.

Individuals can contribute $3,650 for 2022, and those with family plans can contribute up to $7,300. And people 55 and older can contribute an extra $1,000. If you are contributing outside of payroll, then you can take the tax deduction when you file your tax return.

Create an automated savings plan. In addition to contributing the maximum amount to a retirement plan and a health savings account, set up a savings or brokerage account for your excess cash flow. This move will ensure you don’t see it – and don’t spend it. Even if it is a small number, start with an amount that you think works for you, and over time you can increase this number.

Contribute to a 529 college savings plan. It’s never too early to begin saving for a child’s college education. And some states provide a deduction on state income tax for contributions up to a certain limit.

For example, in Georgia, a married couple can deduct up to $8,000 on their Georgia tax return for an $8,000 contribution to each child’s plan. Many plans even allow you to contribute up to the tax return filing date for the prior year.

Stage 3: Add in a Workout for Your Money

Develop a long-term investment plan. Once your financial diet is in place and savings habits are established, you’ll want to establish a financial plan that will last the next 20-30 years. Much like your physical health, you want to make sure your money is staying in shape.

With interest rates so low, it’s likely any money in a savings account isn’t earning much. Therefore, it probably makes sense to invest money that isn’t already earmarked for your emergency fund or needed for upcoming expenses as part of a long-term plan.

Typically speaking, the younger you are, the more it probably makes sense to be more heavily allocated to stocks. As you get older, it may make sense to pare down the risk by adding in more bonds over time. A financial adviser can help develop and set up a plan to meet your needs. Much like fad workouts, be wary of fad investments. If an investment looks too good to be true, then view it with a healthy dose of skepticism.

Like any diet, the hardest part is staying on track once you get started. But there is long-term value if you can stick with it. Having a healthier balance sheet will make you feel better in the long run.

Do not get deterred if you have a hiccup along the way. And remember that it’s OK to treat yourself for doing well, too, because for our financial diet to work, it needs to be a positive experience. That will increase its staying power and put you on a path to financial health.