Laura answers a listener's question about setting goals for the new year that build financial confidence and security after divorce.
Laura answers a listener's question about setting goals for the new year that build financial confidence and security after divorce.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from Deidra, who says:
"I'm in my mid-thirties with a good job and no kids, but recently I got divorced. My ex handled all the money, so I feel clueless about my finances. What money goals should I set for next year that will put me on the right path without feeling too overwhelming to achieve?"
Thanks for your question, Deidra. The fact that you asked this excellent question and are thinking about financial goals tells me you're already on the right path! This post will review steps for taking stock of your finances, deciding what you want to achieve, and setting realistic goals to bridge the gap between the two.
I appreciate you downloading the show, episode 889 of the Money Girl podcast! I'm Laura Adams, an award-winning author, female financial speaker, money spokesperson, and consumer advocate. Please reach out if you're interested in collaborating for a speaking event or PR campaign!
As always, you can reach me using my contact page at LauraDAdams.com. That's also where you can sign up for my free Substack newsletter, The Money Stack. Subscribers get my Money Success Toolkit, which includes a Financial Planning Workbook and Personal Financial Statement calculator to assess your financial situation, set goals, and track your wealth!
I'd love to feature your money question! Send it by email using my contact page at LauraDAdams.com or calling 302-364-0308, just like Deidre did.
5 steps for creating New Year's money goals
Use the following five steps to get the big picture of your finances, set meaningful goals, and create a realistic plan for achieving them.
1. Create or update your Personal Financial Statement (PFS).
I mentioned that you can immediately download my free Personal Financial Statement when you subscribe to my newsletter, The Money Stack. Creating or updating it is a terrific first step for setting money resolutions because it shows the big picture of your finances and what needs to be improved.
If you don't have a starting point or metric for a goal, it's difficult to know if or when you make progress or finally achieve it. I've used my PFS document for years to calculate my net worth, track my financial progress, and keep up with my money goals. You can create your own tracker on paper or a spreadsheet. But if you'd like a copy of mine, it's a free gift when you sign up for my email updates at LauraDAdams.com.
Creating your PFS isn't difficult, but gathering and recording your information takes a little time. Using my template, you'll find a tab for listing your assets. These are things you own with significant value, such as real estate, cars, jewelry, artwork, sporting goods, bank accounts, taxable investments, and retirement accounts.
Do your best to assign accurate market values to your assets. I typically lump together lower-priced or depreciated items, such as household furnishings; however, be as precise as possible for expensive items. Once you account for your assets, add up the total. That automatically happens when you use my PFS template.
Also, consider if each of your high-dollar assets is adequately insured. I include a section on my template for insurance policies, including home, auto, life, disability, and personal liability. Be sure to include your insurer's name, policy number, and the amount of coverage you have.
Below your assets, list your liabilities or what you owe, such as mortgages, car loans, student loans, personal loans, and credit cards. A separate tab on my PFS automatically gives you a liabilities total and subtracts it from your total assets. The resulting number (positive or negative) is your net worth.
Knowing your net worth helps you set better money goals because you stay focused on building it. Even if your net worth only increases by a few dollars, it's a positive sign that you're getting wealthier. But your financial well-being declines if your net worth stays flat or decreases.
Having a higher net worth than last year means you increased your assets, decreased your debts, or both. Even going from a negative net worth to a meager one shows you're making good progress! Remember that even when your income increases, you're not getting ahead financially if your net worth doesn't increase over time.
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2. Check your financial safety net.
As you complete your PFS and enter your bank balances, take note of your savings. Building it should be your top money resolution if you don't have a healthy cash reserve in an FDIC-insured savings account.
A cash cushion helps you manage financial hardship, avoid debt, and reduce stress. Even a small emergency fund is better than nothing and can be your most valuable safety net when something unexpected happens.
One tip to make saving easier is automating a direct deposit to your emergency savings. It could be a percentage of your paycheck or a flat amount each week or month. You can ask your employer to set it up or create your own recurring transfer from checking to savings.
If money is tight, consider increasing your income by starting a side business, working overtime, getting a second job, or doing seasonal work, so you have more to save. Building a cash cushion equal to three to six months' worth of your living expenses is one of the best money resolutions you can have. But starting slowly with a smaller goal, like $1,000, is an excellent way to start.
3. Review your retirement investments.
Since few people have guaranteed pensions or the desire or ability to work into old age, investing for retirement is an essential money resolution. Plus, the earlier you start, the less you need to invest due to the power of compounding.
For example, if you invest $400 a month with an average annual 7% return for 40 years, you'll have over $1 million. But if you start late and only have 20 years, you'd need to invest over $1,900 monthly, nearly five times more, to have $1 million in retirement.
Contributing 10% to 15% of your gross income to a retirement account is an excellent goal. Or to contribute one percent more than you did last year. If your employer offers a workplace retirement plan, such as a 401(k) or 403(b), with free matching, always contribute enough to maximize it. Otherwise, you're saying no to free money.
Make investing for retirement a top money resolution. It's a huge mistake to believe that you can't afford it, will catch up later, or can rely on Social Security retirement benefits as your sole source of income. Waiting for a windfall, like a raise or bonus, wastes precious time. You're never too young to begin planning for your future; even regularly
investing a small amount is better than nothing.
READ ALSO: Am I saving enough for retirement?
4. Create a debt payoff plan.
If you're struggling with debt or want to get rid of it faster, make that a money resolution. I've created several resources to help you. One is my best-selling course, Get Out of Debt Fast—A Proven Plan to Stay Debt-Free Forever. It guides you through every detailed step of creating a realistic payoff plan. You can learn more and sign up for the class at LauraDAdams.com.
I also wrote Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love. It's available as a paperback, ebook, and audiobook.
If you have high-interest loans or credit card debt, they challenge your ability to achieve financial success. So, don't accept expensive credit card debt as a way of life or allow it to rob you of the ability to save and invest.
Instead of financing a lifestyle you can't afford, make sacrifices to improve your finances and net worth. For example, create a budget so you know where to cut back, wait a little longer before buying something over a certain amount, and find ways to increase your income.
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5. Set a financial word or theme for the year.
As you create your PFS, it will probably be clear that your money resolution(s) should save more for emergencies, get rid of high-interest debt, boost your retirement contributions, or do all three.
Another practical approach is setting a New Year's theme or money word for the year. That can remind you of the overall change you want for your financial life.
For instance, my money word or objective is "retirement." I've kept that same theme for years, but you can change your word annually. If I have a significant financial decision to make, I turn my attention to the word "retirement." If something doesn't bring me closer to accumulating a larger retirement nest egg, I don't do it.
Setting a money theme for the New Year can shift your mindset, motivate you, or be a guide when you're unsure what to do. Your word or phrase for the year could be financial freedom, self-employment, early retirement, family future, or anything that supports your financial dreams.
Once you have a financial word for the year, build habits that ensure you'll reach it. Like automating saving, enrolling in a retirement plan at work, regularly funding an IRA, and tackling your highest-interest debt.
An excellent way to stay motivated to achieve money resolutions is to keep visible reminders. For instance, place cues in your kitchen, car, and workplace that routinely get your attention and foster good habits.
You might write your money theme on an index card for your wallet. Or put it on a sticky note for your credit cards, bathroom mirror, car dashboard, and computer monitor at work. You might also create a journal entry about why your money theme is essential and what you'll do to accomplish it each day.
Consider creating your financial resolutions together if you have a spouse or life partner. If you're single, consider getting together with a close friend or family member to discuss your money resolutions for the coming year. You could discuss your goals over dinner, during a walk, or on a long drive somewhere.
If you don't have someone you feel comfortable talking to or want professional guidance, make an appointment with a fee-only certified financial planner (CFP). They don't get paid for recommending products, just for time to create a financial plan. NAPFA.org, the National Association of Personal Financial Advisors, is an excellent place to find a fee-only advisor.
These steps can help you understand your financial health, identify weaknesses, and plan wise money resolutions. Here's to a Happy Financial New Year, everyone!
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That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Brannan Goetschius is our director of podcasts, Holly Hutchings is our digital operations specialist, Morgan Christianson is our advertising operations specialist, Davina Tomlin is our marketing and publicity associate, and Nathaniel Hoopes is our marketing contractor.