As the New Year begins, many Americans are inspired and motivated to make positive changes in their lives. Interestingly, a recent poll by research firm IPSOS notes the top two resolutions for 2020 are to Eat healthier (51%) and Manage finances better (51%). While financially related goals are consistently on the top of most New Year’s resolution lists, many people struggle with implementation. From difficulty knowing where to begin to finding and maintaining the discipline to stay on-track, addressing financial goals is not always as easy as it may seem. Taking a proactive approach to improving your finances may help you to feel more empowered, reduce stress and improve your overall quality of life in 2020. Consider following these smart money moves for the New Year.
Stop guessing and develop/update your Personal Financial Plan
According to a survey from Blackrock in 2019, money was noted as the top worry for most Americans, ranking higher than health, family and work. The question becomes, if money is a top worry and a top pick for financial resolutions, then why do so many people fail to develop a documented comprehensive financial plan? If you were building a home, you probably wouldn’t just grab a hammer. Instead, you would follow detailed plans that were drafted according to building code. While you might change or modify some plans along the way, you would have a solid game plan to follow.
Now imagine for a moment, building a home from the foundation up without any plans – you would probably have a high degree of stress. Finances are no different. Unfortunately, many of us use “back of the envelope” calculations that fail to illustrate and capture the real life scenarios that we want to pursue. Unsurprisingly, the better and more detailed your financial plan is, the more financial clarity you may gain from the process.
Understanding the maximum amount that you can spend under various scenarios, when you no longer have to work out of necessity, and the type of lifestyle you are on-track to live may help you to limit the financial stress and worry that impacts so many of us. This process will also help you to establish goals for today and the future. Gaining financial clarity can also help us to reframe the way we think about money. After all, money is simply a tool to help us focus on the things that are most important to us.
Flip your budget upside down
When it comes to budgeting, many of us use a top-down approach where living expenses are at the top of the priority list and savings are at the bottom. In this scenario, whatever is left over each month gets saved and too often, not much is left over. While it may seem easier said than done, flipping your budget upside down so that savings goals are at the top of the list may help improve your chances of savings success. Cash reserves, investment and retirement savings, education funds and other savings goals should be budgeted first, not last. After making your savings goals, you should then prioritize paying down other of various forms of debt.
Adjust retirement plan savings to the new 2020 limits
With fewer and fewer employees having access to defined benefit pension plans, it is more important than ever for savers to fully leverage their company provided 401(k) and there are a few 
important considerations. First, if your company doesn’t currently offer a retirement plan like a 401(k), speak to them about setting one up. New tax credits and incentives offered through the recently signed SECURE Act make it even easier and more cost effective for any business to start a retirement plan. If you already have a plan, be sure to consider boosting your savings rates. For 2020, the maximum contribution limit for a 401(k) is increasing to $19,500 plus an over age 50 catch-up of $6,500.
In addition to increasing your contributions, it is also critical to determine whether to utilize pre-tax savings in a traditional 401(k) or post-tax savings in a Roth 401(k). Unfortunately, many savers are using the wrong type of plan and the long-term tax impacts can be significant. Consider speaking to a professional that can help you determine which type of 401(k) is most advantageous for you.
Rebalance your portfolio
If you are like many savers, it has been awhile since you last reviewed and rebalanced your portfolio, and any time the markets make any major moves it can be a good time to examine the merits of rebalancing. Rebalancing is a tool that may prove effective in helping to manage risk. Doing so may aid in bringing the various investments in your portfolio into proper alignment. It is important to remember that as the markets fluctuate over time, the original investment mix you were targeting can change and alter the amount of risk in the portfolio. For example, if you were targeting a 60 percent stock and 40 percent bond portfolio and haven’t rebalanced in a few years, your mix may have over 70 percent in stock today.
Unfortunately, many investors fail to properly rebalance over time. There are many approaches to rebalancing, from rebalancing annually or semi-annually, to reallocating when any piece of the portfolio deviates from the target by 5 percent or more.
When determining your rebalancing strategy, be careful to review transaction fees and taxes. Keep in mind that capital gains or losses will be realized in non-retirement accounts, so speak to your tax advisor prior to making any adjustments. Remember, investing involves risk and rebalancing does not prevent investment losses. Instead, it is a means to keeping your portfolio balanced between the various asset classes selected.
Developing financial resolutions based upon your unique goals can be a powerful exercise. Consider addressing the Smart Money Moves noted above and consider speaking to your financial adviser to determine the most appropriate approach for your unique circumstances.
Kurt J. Rossi, MBA, CFP®, AIF® is a CERTIFIED FINANCIAL PLANNERtm & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.
