15 Financial Tips For a Successful Year
KEY POINTS
15 financial tips: short-term and long-term
Reduce unnecessary cash outflows
Take control of your debt and your credit report
Maximize your long-term net worth
Welcome to 2023 !!!
We are excited to see what the New Year has in store. Let’s set some key New Year’s Resolutions before it’s too late.
We will take a cardio theme as many of us will strive to increase our health throughout the New Year.
WALK - - - JOG - - - RUN
WALK
1 - Discretionary Expenditures
The list of potential expenditures to cut can be lengthy. We recommend focusing on those that are costly, discretionary, and impact more than your finances.
First up, alcohol and cigarettes.
We understand these may be difficult to abstain from, but the financial, medical, social, and family benefits could be substantial. The excise taxes paid on these discretionary expenses are extraordinarily high. Any incremental reduction in these expenditures could prove life changing for you and your loved ones.
Next, review your annual bank and credit statements to determine where you are spending your money. Make a list of your discretionary expenses, sharpen your pencil and devise a plan to pare them down.
2 - Treat Meals & Entertainment as a Reward
We all know eating out is extremely costly compared to preparing meals at home. However, it does provide many key benefits including time savings, entertainment, cultural experiences, and an opportunity to invest in relationships.
Reduce your overall meals and entertainment, to the extent possible.
Next, let’s explain what we mean by making meals and entertainment a reward.
The first step is to work your way through this entire list of resolutions. Formulate your plan of action. Then select key milestones that you and your family must achieve before rewarding yourselves with a dinner out or other form of entertainment. For example, you may decide to delay attending a local concert until you create or update your legal will (see below).
3 - Subscriptions
We all need to review our subscriptions on a regular basis and avoid subscription creep.
It is not uncommon for a family to have multiple streaming services (e.g., Netflix, Amazon Prime, Disney+). It is easy for someone to inadvertently subscribe to an additional paid channel subscription while using one of these streaming services.
The same applies to exercise services (e.g., Peloton App, Apple Fitness Plus, Daily Burn). We are avid users of exercise streaming services; however, we remind our readers to ensure they are actually using the streaming services they pay for.
Do not forget to review the big box stores dominated by Costco, Sam’s Club, Walmart+, BestBuy and several others. Make sure you are receiving value for your subscription dollars.
We will also group cellphone plans in this category. The best time to address your mobility needs is often Black Friday. However, it may make sense for you to review your phone plans now and shop for deals across the various carriers. You may save money by cancelling unused options, switching to a lower tiered carrier, or combining accounts. If you decide to replace your phone consider a refurbished phone as such may come with a warranty and cost less than a brand new phone.
4 - Quick Budget Experiment - Envelope System
Ideally you already read our post How to Create a Budget That Works For You and have created a budget. If not, you should prioritize creating a comprehensive budget. Such can take time and involve multiple discussions with your family and financial advisors.
In the meantime, you may consider implementing the envelope budget system for a period of three months. Hopefully you will have created a comprehensive budget during this three month period.
What is the envelope budget system?
At a high level, you withdraw your net pay from your bank account on payday (you need to leave sufficient funds in your bank account to cover automatic recurring payments). You then create envelopes for each spending category (e.g., groceries, gas, clothing, restaurants, entertainment, alcohol, cigarettes, etc.). Next, allocate your funds and insert such amounts into the respective envelopes.
You must stop utilizing your credit cards and pay cash for all expenses between now and the next payday. If you reach for the restaurant envelope and it is empty you cannot allow yourself to go to a restaurant until the next payday. This process can be a great tool for teaching you to live within your budget and how to allocate such budget.
5 - Vacations
The cost of vacations can vary dramatically. Your ability to find vacation options with varied price points is critical to your savings goals.
You need time to research, plan, discuss, and coordinate your vacation. Ideally, your 2023 vacation planning is already well underway. If not, you should prioritize this and maximize your savings potential.
As you get closer to the vacation date, your trip may become more expensive and the trips available may decrease.
Tip
Foreign exchange fees can exceed 4% of your purchases abroad. Consider a Wise debit card to minimize these fees and keep more of your hard earned money.
JOG
6 - Pay Yourself First
What do we mean by paying yourself first?
Your paycheck already has a list of standard deductions that reduce your pay before it hits your bank account. Before you touch those funds, you should allocate a portion (to the extent possible) to a savings account.
It is vital that you align your savings steps like this one to an overall investment plan as described in our post How to Set Investment Goals and Leave an Enduring Legacy.
Ideally, the funds should automatically transfer from your checking account to your savings account. The compounding impact of these regular incremental savings can have a profound impact on your net worth.
Where will you obtain the funds to pay yourself first?
We are confident that most readers will be able to generate additional savings if they work through each step of this post.
7 - Maximize Employer Savings Plans
Check with your company’s Human Resource department and determine if your employer offers contribution matching regarding the company’s employee savings plan. For example, a 2:1 matching ratio would result in your employer matching your $100 contribution with a $200 contribution for an aggregate contribution of $300.
The power of matching and the potential for compounding returns can grow your account exponentially and help to maximize your long-term net worth.
8 - Prioritize Your Debt
The concept of debt management is explored in our post Financial Literacy - A Definitive Guide and integrated into your overall financial plan.
A great first step is to summarize all of your debt (e.g., mortgage, line of credit, personal loans, credit cards, student loans, automobile loans, etc.). Ensure you understand the monthly cash flow requirements, interest rates, and outstanding balances.
At a minimum, you need a plan to ensure you make the minimum payments required on all of your debts without missing a payment. Your credit rating is dependent upon your debt servicing skills. The interest rates you pay are contingent on your credit rating.
Refer to How Can Your Credit Report Increase Your Net Worth? for more information on credit ratings and interest rates.
Any excess funds should be allocated towards your debt with the highest interest rate. Alternatively, you may consider repaying a debt with a slightly lower interest rate, but that has a low outstanding balance: sometimes eliminating any form of debt can provide valuable peace of mind and a confidence boost.
You may also consider consolidating your debt at a lower interest rate. If you are fortunate enough to own your home with positive equity, you may be able to consolidate some of your high interest rate debt via a Home Equity Line of Credit. The interest paid on such HELOC will not be tax deductible, but the interest savings could be substantial.
9 - New vs Used
We have all heard the expression that a brand new car loses 30% of its value as soon as you drive it off of the lot. This is a very general statement and highlights a fundamental principle:
New costs more money than Used
Yes, this is obvious.
This concept is explicitly illustrated in our post Car Buying Tips - New vs. Used. Don’t buy a new car without considering the insights provided by this article.
We can save substantial money if we learn to accept that used items can often be as useful and satisfying as new ones. We need to apply this principle to cars, cell phones, designer clothing, computers, televisions, jewelry, furniture and many other items.
Most of the assets listed above are depreciating in nature. Whenever possible, reduce your investment in such assets and allocate the savings to assets that appreciate in value (e.g., investment portfolio).
10 - Rebalance Your Portfolio
We recommend you work with your family to review and reset your financial goals. A natural part of this process is rebalancing your investment portfolio to ensure it is aligned with your financial plan. Such process can be expensive and have long-term ramifications to your net worth.
We recommend you read our post How to Choose a Financial Advisor - A Definitive Guide and work with financial advisors to ensure the portfolio is rebalanced to take into consideration your financial goals, liquidity requirements, risk tolerance, and time horizon.
11 - Calculate Your Net Worth
Your net worth equals your assets minus your liabilities. The process of collating this information can be very informative. You may identify assets you can sell or others that are under-performing. The Prioritize Your Debt section above discussed the benefits of understanding your debt profile. A further analysis of your expenses may provide opportunities to reduce your cash outflows, increase your assets, and maximize your net worth.
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12 - Take Control of Your Credit Report
Central Banks around the world raised interest rates significantly in 2022. As we enter 2023, more interest rate increases appear to be on the horizon. You cannot control the actions of Central Banks or how such impacts the interest rates you pay on the debt that you carry.
However, you do have a degree of control over your credit report.
Every creditor that you engage will obtain a copy of your credit report. It is constantly updated, and it has a significant impact on the interest rates you pay for your various types of debt. A key aspect of the report is your credit score.
Your credit score is comprised of 5 key categories: payment history, available credit utilized, length of credit history, new credit, and credit mix. We refer you to our posts How Can Your Credit Report Increase Your Net Worth? and Financial Literacy - Credit Scores to learn how to manage each category.
For example, payment history comprises approximately 35% of your credit score. You need to pay your bills on time every time, as referenced under Prioritize Your Debt noted above. Your credit score will incrementally improve as you take concrete steps to establish a clean payment history.
It can take time for your actions to be reflected in your credit report. Be patient and ensure you stick to your plan. Eventually, you should benefit from an improved credit rating and access to lower interest rates.
13 - Review Your Insurance Costs and Coverages
You may be holding insurance policies underwritten by multiple insurance companies. Such coverages may include home, auto, life, disability, and many more. The cumulative costs can be substantial.
You should obtain copies of all of your policies and summarize the key terms (e.g., cost, coverage, deductibles). You may be able to make minor changes immediately related to deductibles, jewelry riders, sump pump riders, etc. You may also be able to reduce the annual cost by paying the annual premiums upfront instead of monthly.
Next, you should consider engaging an insurance broker to reassess your insurance needs and obtain competitive quotes. A qualified advisor should be able to help you find a quality insurance company at a competitive price.
14 - Rent vs Buy
The decision to buy a home versus rent a home is a very personal one. The financial implications may have a significant impact on your long-term net worth. There is a lot to unpack which is beyond the scope of this post. For a deeper analysis refer to Should You Buy or Rent Your Home? .
15 - Update / Create Your Will
Our post How to Draft a Will - Your Legacy, Your Way provides insights into how critical a will is to your legacy plan. At a high level, it allows you to select the beneficiaries that will receive your assets when you die. The government will have increased control over how your estate is divided if you do not have a legal will.
We recommend you engage a lawyer specializing in wills and estates to draft your legal will. Such process may also involve other professional advisors depending upon the complexity of your estate.
Summary of Financial Tips
We wish you an amazing 2023 and hope that this checklist provides a great starting point to achieve your financial goals.
