The end of the year is a good time to take stock of your finances – the things you were able to accomplish during the year and to identify the things that need improvement to reach financial freedom.
Here ‘s a list of steps you can take to get your financial house in order for next year. Though you can do this anytime, beginning of the year is when most of us make resolutions – whether it’s working out and getting in shape, or take the steps that will make us financially independent.
Track Your Income and Expenses. Establish A Budget
This might sound old school but knowing where your money is going is half the battle. Once you put your income and expenses on paper, and prioritize your expenses, you are on your way to financial freedom.
Be ruthless in cutting unnecessary expenses, and put the savings to work. You should plan to live well within your income and have funds to save and invest for the future.
Reduce Debt – Pay off High-Interest Debt
High-interest rate loans are the biggest barrier to building wealth. Interest rates on credit cards can be higher than 15%. Most folks making only minimum payments are surprised at how long it would take them to pay off the loan.
If you have high-interest loans such as credit card debt, try to pay it off as soon as you can. If you have debt from multiple credit cards, pay off the one with the highest interest rate first, then the second-highest rate next, and so on. Find out if there are opportunities to consolidate your loan with a lower interest rate.
Having high utilization on your credit card affects your credit score. Poor credit score leads to higher interest rates on home and auto loans.
Contribute to 401(k) or IRA
Average American now spends about 25 years in retirement. No one knows if Social Security will be making promised payments in 30 years. Many older people are finding out that Medicare will not pay for rising nursing and assisted living expenses.
Ensure that you are contributing enough to get the company match. You should be contributing as much as you can. This is true for younger folks as this will allow the magic of compounding to work in your favor.
If you get a raise, make sure to increase your 401(k) contributions. Set your 401(k) contributions to auto-increase every year. I do this with my plan, and my contributions go up every year without me having to do anything.
Build a Diversified Portfolio
Build a diversified portfolio and hold it for the long-term. Don’t tinker with it too much. Whether it’s your 401(k) or your discretionary portfolio outside your retirement plan, focus on the long term. Re-balance your portfolio once a year. Don’t try to time the market or buy the latest fad in the market.
Very few frequent traders make money in the long term. The time they spend following the economy, and the market indicators is better spent elsewhere.
Develop A Financial Plan
Have a financial plan. This means knowing how much you will need in the future for retirement, your children’s education, etc. Then build a portfolio that will help you reach your financial goals. Have realistic return expectations, and stay focused on the long term. Automate your investments where possible.
Increase Your Income
Look at opportunities to increase your income. Whether it’s asking your boss for a raise, or looking for another job, do it this year. Start the side hustle you have been wanting to start for a while. Sign up for a new course that will make you valuable. If your company has an educational allowance, make use of it.
Bottom Line
Make this year count. Let this be the year you get your finances in shape. If you are already on the way to financial independence, take the next step by increasing your savings.
Most people give up on their new year resolutions only a few weeks into the year. To avoid that, automate your finances as much as possible. You will look back in a few years, and realize it wasn’t so hard after all.