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Forget Resolutions This Year and Focus on Financial Habits Instead

Castlepoint Blog: Kendall's Counsel, The Point
February 09, 2022

New Year’s resolutions have been a thing for a long time, but according to a study, over 80% of people abandon their resolutions by the end of January.1

You may find that a better approach in 2022 is to focus on putting the right systems in place. In essence, improving your habits. James Clear, the author of Atomic Habits, said, “Habits are the compound interest of self-improvement. A small habit—when repeated consistently—grows into something significant.”2 

The great thing about choosing new habits rather than new resolutions is that habits are process-oriented. Most resolutions tend to be too idealistic, which can be difficult to define. To get you started, here are some ideas on creating better financial habits this year:

Pre-determine where every dollar spent will go.   

Try to make as many financial decisions as possible ahead of time, meaning you will pre-determine where every dollar goes. Dave Ramsey calls this “giving every dollar a job to do.”3 

It’s easy to spend now and then see if there is enough at the end of the month for the rest of your bills. In 2022, prioritize the areas that are most important to you ahead of time. For example, you may determine that vacations are important to you, so start funding your vacation account today before mindlessly shopping for items that may not be as important. 

Tax refunds are a prime area for pre-determining your habits, especially considering that around 70% of Americans expect to receive a tax refund each year.4  

Take the time to decide now where these dollars will go before, they land in your bank account; otherwise, human nature will set in, and you’ll find plenty of things to spend money on. Ideally, use some of the tax return funds for either paying down debt or adding to your investment accounts.

Have a rule to never spend money on discretionary items until after 24 hours, especially if you are excited about the potential purchase. The 24-hour waiting period will give you enough time to think about whether you really need to spend the money, or you just want to spend it.

Pay yourself first and automate.

One way to ensure you will improve your financial life is to pay yourself first. Then, you should automate your financial life as much as possible.  

Here are some specific ideas:

  • Utilize direct deposit to ensure part of your paycheck automatically goes into a savings or investment account.  
  • Make sure your retirement contributions are automatically invested in a target asset allocation aligned with your long-term goals.   
  • Have your 401k plan automatically increases by 1% each year (or with every paycheck increase).
  • Create auto rebalancing in your retirement accounts to ensure your investment positions don’t get too overweighted or underweighted. Research shows this is an effective way to reduce unnecessary risk.5
  • Create an automatic transfer from your savings accounts to your long-term investment accounts when it exceeds a pre-determined amount. Doing so will ensure your cash doesn’t sit on the sideline while inflation continues to eat up purchasing power, which is running at 7% over the last 12 months.6

Simplify where you can.

Consolidate your bank and investment accounts as much as possible. You may have accumulated a variety of retirement accounts from former employers through the years. Track down those accounts and consolidate them into one account — a personal IRA. This makes it easier to track required minimum distributions (RMDs) if you are age 72 or older.  

You can likely improve your odds of success by consolidating your other investment or bank accounts. Specifically, you may be able to switch out of high-fee investments in one account into low-fee funds in another.

You may also find that using cash or one debit card for all discretionary spending will help you stay more disciplined with purchases. The process of visually seeing money go out of your account will likely change your spending behavior versus using a credit card.

Trim the fat

Review all recurring expenses and subscriptions and ask yourself one question: “Does buying this still bring joy or value to me?” If not, cancel it immediately.

You should also take a look at your overall spending and understand where your money is going, especially the discretionary areas that you spend the most in. See if you can identity what triggers unnecessary spending in discretionary areas. For instance, if you have the Amazon app on your primary phone screen, you may try hiding the app or even deleting it all together.  

Take a look at your home and automobile insurance policies. Review your coverage and level of deductible on each policy. Review them with your insurance agent and see if makes sense to increase your deductible so that you can save money on premiums. You also can consider shopping your insurance with other providers to see if you can save money.

Start investing earlier.

One little-known fact about Warren Buffett is that over 99% of his wealth came after the age of 50.7 You may not become one of the richest people in the world like Buffett, but you can greatly benefit by getting your money invested earlier each year.

For example, if you plan to fund a Roth or Traditional IRA account for 2022, contribute the money now in January so that you increase the amount of time that is compounds. This is called “the time value of money,” and increasing it will tilt the odds in your favor of growing a much larger nest egg.

To illustrate the power of investing earlier, consider contributing $6,000 into your IRA in January each new year rather than waiting until the April deadline of the following year. Let’s assume you continue to contribute this amount for the 30 years and further assume you will earn a compound annual average return of 6%. By getting the money to work in January, you will have $502,810 in your IRA versus $474,349 waiting until April, or about $28,000 additional value.8

Conclusion

Your financial standing is a lagging measure of your consistent financial habits. Just like the tortoise eventually beat the hare by staying consistent, you can win over time as well.

Habits work only if you take action now, ideally in the next 24 hours. Keep moving forward, one habit every day, and watch your 2022 be a big success.  

Sources 

  1. https://www.inc.com/marla-tabaka/why-set-yourself-up-for-failure-ditch-new-years-resolution-do-this-instead.html
  2. https://twitter.com/jamesclear/status/1341968580280266754
  3. https://www.joplinglobe.com/news/dave-ramsey-give-every-dollar-a-job-to-do/article_dc05b72c-1acd-11ec-986c-93c7a3f7ffa6.html
  4. https://www.foxbusiness.com/money/americans-tax-refunds-misconceptions
  5. https://www.kiplinger.com/article/investing/t023-c000-s002-rebalancing-your-portfolio-to-reduce-risk.html
  6. https://www.pbs.org/newshour/economy/inflation-jumps-7-percent-the-biggest-increase-since-1982-as-americans-increase-spending
  7. http://www.gobankingrates.com/personal-finance/rich-warren-buffett-age/   
  8. https://investor.vanguard.com/investor-resources-education/article/ira-contributions-why-wait 

The content of this article is developed from sources believed to provide accurate information. The information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. All expressions of opinion are subject to change. This content is distributed for informational purposes only, and is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services. Past performance is not a guarantee of future results. Index performance does not reflect the expenses associated with the management of an actual portfolio.

Castlepoint Wealth Advisors | Oklahoma Wealth Advisors | Kendall King - Founder & CEO

Kendall King, CFP®, AEP®

Founder & CEO of Castlepoint Wealth Advisors

Kendall is the Founder and CEO of Castlepoint Wealth Advisors, an Independent Wealth Management firm in Oklahoma City. He is responsible for the strategic direction and vision of the firm, and serves as lead advisor to a diverse group of clients, with special focus on entrepreneurs. With more than 18 years experience in advising clients on a wide range of wealth management topics, Kendall possesses extensive expertise and specialized knowledge regarding IRA and retirement planning topics.

Read more Kendall’s Counsel blog posts and articles.