This is the year you’re going to crush your resolutions. You’re going to exercise five days a week, cut back on greasy foods, and save more—a lot more—money. You’re going to feel motivated the whole time, so it will be simple. It’s just a matter of adhering to your mission. Mind over matter. Right?
Around 45% of Americans usually make New Year’s resolutions, according to a University of Scranton survey published in the Journal of Clinical Psychology, and yet just 8% achieve them.
The first two weeks of the year are the easiest to stay committed, with 75% of people maintaining their resolution through the first week and 71% through the second.
But after that, their commitment starts to taper off. By February, only 64% of people are still sticking to the goals they set out to achieve. Six months into the year, that number drops to less than half.
The problem? It takes 66 days on average to form a habit, let alone achieve a goal. By bailing after week two, resolvers aren’t giving themselves adequate time to integrate their new behavior into their routine.
So this year, don’t make resolutions—create habits. They can be daily habits, like flossing, or longer-term goals, like going to the dentist twice a year.
Now, do that with your money.
By focusing on habits, you will adopt simple, sustainable behaviors that will put you on the path to achieving bigger and better goals in 2017 and beyond.
1. The Resolution: Save just a little more.
Good financial planning happens through careful consideration of dollars in and dollars out, as well as being aware of your goals. By setting savings goals—targets on the horizon to work toward—you’ll make it easier to actually get there.
Do you want to move next year? Figure out how much that will cost you and set the savings goal to get there. Is your goal to buy a house in five years? Do the math to see what you need to save in your ideal neighborhood. Calculate how much you need to save on a monthly, or even weekly, basis to accomplish that, and then set up auto-deposit so that the money goes directly into your savings account before you have the chance to spend it.
If you’re already tracking your spending, saving, and income, consider increasing your savings by 2% to account for annual inflation. If you have goals but don’t know your cash flow, then start there. Spend the month of January writing down everything you have to spend: your rent or mortgage, utilities, transportation, and food. Then, save the rest.
“It’s much better to live on a budget by watching your checking account balance dwindle to zero at the end of the month than to live beyond your means until it’s too late,” says Dan Egan, Betterment’s Managing Director of Behavioral Finance and Investing.
The Habit: At the start of the new year, review your goals and consider automatically increasing whatever you’re saving by 2% to account for inflation, Egan says. Although inflation might vary from year to year, the Federal Reserve tries to keep inflation as close to 2% as possible.
2. The Resolution: Fund your IRAs.
Did you max out your IRA for 2016? If you are under age 50, the maximum contribution per year for 2016 is $5,500. If you are 50 or above, that number increases to $6,500 per year.
If you didn’t max it out, then consider maxing it out by Tax Day: April 18, 2017.1 If you can afford to fully fund your IRA in one contribution, do so as quickly as possible; it will give the most amount of money the most amount of time in the market. While people often delay their IRA contributions until the following April (simply because tax time is when they’re thinking about it), it’s best to fund in January, Egan says. Why? Every month earlier that you can get in the market is one-twelfth of the year’s worth of growth.
However, if one large contribution to your 2016 IRA isn’t possible, consider contributing a fraction of it each remaining month from now until April. For example, if you wanted to reach the maximum contribution limit by the latest possible deadline (Tax Day), and you saved from January to mid-April, you’d have to save approximately $1,375 a month to hit it.
Once you’ve fully funded your 2016 IRA, consider funding your 2017 IRA immediately and aim to max out by December 2017. If you can fund the full $5,500 all at once, do so. If not, you have from mid-April to December—almost eight months—to reach it. That’s approximately $685 a month. By maxing out by December 2017, you’ll be able to start funding your 2018 IRA in January 2018, giving you more time in the market.
If you have already maxed out your 2016 IRA, consider saving toward hitting the maximum for your 2017 contribution. Again, if you can max out your 2017 IRA in January 2017, do so in order to give your money the most time in the market. If not, aim to max out by December 2017. That gives you 12 months to reach the maximum, which is around $460 a month if you’re trying to reach $5,500.
The Habit: Using the examples above, determine how much you plan to contribute to your IRA each month in 2017. Then, consider funding your IRA as if it were a required monthly bill—set up auto-deposit so that the money comes directly out of your bank account each month. Bonus: Set a monthly calendar reminder to contribute any spare money you have leftover from your budget.
3. The Resolution: Save half your raise.
One of the problems that people have with saving is that it usually means giving up some consumption now, Egan says. For example, let’s say you’re making and spending $4,000 a month (after taxes). You decide you want to start saving an extra $1,000 a month, so you cut your spending down to $3,000. “You’re going to feel that,” Egan said. “You’re going to have to go out to dinner less, you’re going to have to spend less. So, in that case, saving feels bad.”
Now, imagine on the other hand that you’re spending $4,000 a month and you get a raise to $5,000 a month. Here’s an opportunity to save more without feeling bad about it—without reducing your consumption.
The Habit: Every time you get a raise, consider increasing your savings by about half of it. So, if you get a $1,000-a-month raise, spend $500 and save $500.
Keep in mind that your spend-to-save ratio will depend on how much you’re already saving, Egan said. If you’re already saving a lot, then you could save 20% and spend 80% of your increased income. If you’re saving very little, save 80% and spend 20%.
4. The Resolution: Save your bonus.
Like with getting a raise, getting a bonus is an opportunity to save more without reducing consumption. But, the amount of your bonus that you save, of course, depends on what percentage of your expected income comes from it.
For example, if you’re a commissioned-based employee and this bonus is what you’ve been waiting for all year, you’ll likely want to save most or all of it.
The key is to honestly assess your financial situation to determine how much of your bonus you should be saving. “I’m not such a savings idealist that I think you should just save as much as possible and live on ramen noodles right now,” Egan said.
Some questions to ask yourself include: Have you maxed out your tax-deductible accounts for the year? Do you have an adequate safety net set aside for emergencies? Are you on track with your other savings goals?
The Habit: If the answer is yes to any of the above questions, then go ahead and spend some of it, maybe 30%. “I think it should feel like a bonus,” Egan said. “It should feel like you’ve been appreciated.”
To avoid temptation to spend the whole thing, make the decision of what you’re going to do with this windfall before you get it. “Take whatever amount of the bonus that you want to save out of your pocket completely,” he said, “and then have fun with the rest.”
Integrate your new habits into your daily life.
Make it easier to accomplish your goals by making the execution as effortless as possible. Some examples for how to save more:
- Set up auto-deposit so that the money goes directly into your Betterment account when you get paid.
- If you have an employer-sponsored retirement plan, such as a 401(k), set up auto-increase so that your contributions automatically go up each year.
In other words, you don’t actually have to be virtuous to see riches. “When you see people who seem to have it completely together, it’s not necessarily because they’re enforcing frequent self-control,” Egan said. “They’ve just designed their life so that their good habits are effortless.”
1This article is for educational purposes only. When deciding whether to rollover a 401(k) account or other retirement account, you should carefully consider your personal situation and preferences. Relevant factors may include that: (i) 401(k) accounts may offer greater protection from creditors than IRAs. (ii) In some cases, the ability to take penalty-free distributions at an earlier age or to defer minimum required distributions. (iii) Some 401(k) accounts may also allow for loans or distributions in a broader set of circumstances than IRAs. (iv) Some 401(k) plans may also offer specific educational and advisory services to participants that are unavailable to some IRAs. (v) Some 401(k) plans may have lower fees and expenses than some IRAs. (vi) Some IRAs may offer a broader range of investment options than some 401(k) plans. (vii) Special tax rules may apply to the rollover of employer securities.
You should research the details of your 401(k) and speak to a tax and other advisors about whether the features of your 401(k) are relevant to your personal situation. The rollover process is currently automated for rollovers from select providers. If you have a provider that is not part of our automated process, you will receive an email with a checklist for completing your rollover to Betterment. In processing your rollover request, Betterment will be acting at your direction.
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