New Year Financial Resolutions

We have made it past Christmas and the ‘silly season’ has almost finished.   For many of us, the break provides us time to unwind and refresh, once the bustle of Christmas is over.  It is also a prime time to reflect over the past year, and consider how we wish to approach the coming year.  While New Year’s resolutions tend to focus on our physical health and wellbeing, it is also a great opportunity to review and plan your financial wellbeing. 

For those that do not have any financial plans or goals, it is time to plan.  As the old saying goes if you fail to plan you plan to fail.  Some people may not know where to start, and they need assistance to do so.  Others will have good financial records and can use these as a basis to plan from. 

The first step is to set some goals or achievements to aim for.  For example, the goal may be to clear the $40,000 owing on the mortgage within 3 years.   Remember it is a lot easier to pay off your mortgage while interest rates are low. For those on a floating rate loan, current interest rates are probably 3% lower than they were this time last year. The next financial goal may be to have $15,000 available in five years time to partially pay for your child’s tertiary education.  Your long term financial goal however may be to provide for your retirement.  You intend to retire in fifteen years time and would like your investments to provide the equivalent of $25,000 per year after tax.  By coming up with these defined financial goals, the next step is to see if they are achievable.  

Unfortunately this becomes the hard part.  A number of assumptions need to be made.  Two critical factors are the assumed rate of return, and your life expectancy.  It goes without saying that there needs to be surplus income to provide for your savings.  It is impossible to plan precisely as the assumptions that you use are subject to too much variation.  When we plan, it is preferable to use a low rate of return, and an optimistic life expectancy figure.  This means that the required rate of savings may be overstated.  If you can achieve that figure within your budget, you will be well on your way to financial freedom. 

But what happens if the figures don’t stack up? It may be that you need to review your budget and see if you can either earn more or spend less to be able to save more.  You may need to increase your retirement age by a couple of years.  Whatever you do, do not simply become despondent and give up.  By doing so, the long term financial consequences will be great, and your standard of living in retirement may be a lot lower that what you would like.  Don’t give up if there is a shortfall.  Starting small is so much better than not starting at all, and can develop a very useful saving’s habit!

A good book to read over the summer which provides a sound basis for saving for future goals is “The Richest Man in Babylon” by George Samuel Clason.

The longer we procrastinate, the less likely we will achieve our goals.  Putting things off for another year of two could make the difference between financial success and failure.  Remember, few people make a conscious choice to live their retirement years at poverty levels.