By Ruth Mahoney, President, Capital Region, KeyBank
For most, the will to overcome a lifetime of bad habits and stick to meeting their New Year resolutions weakens with each passing day. They get stuck eyeing the destination instead of mapping the journey that makes reaching the destination possible.
For those making financial resolutions, and one in four do, the destination is most commonly rooted in improving financial wellness, whether it is to save more, pay down debt or spend less. The problem with these well-intentioned goals, which undoubtedly will help people improve their financial wellness, is they are not actionable plans. They do not map the journey.
Financial wellness is a journey
According to MagnifyMoney, shoppers bagged an average of $1,054 in debt this holiday season. More than half of those surveyed didn’t plan to charge so much. An equal amount said it will take at least three months to pay off the expenses. That’s why most financial resolutions are like vowing to diet after overeating on Thanksgiving. We’re dissatisfied with our immediate actions and want to change our behaviors.
The question to answer is this: are the changes warranted and if so, are we committed to making the right ones?
Most resolutions fail because they are too vague, too unrealistic or a lesser combination of both. Don’t make that mistake. Take a financial inventory and assess your financial wellness so you can really dial in on how you can better manage your finances.
- Many banks, including KeyBank, offer tools like HelloWallet that can help you:
- Get a full picture of your financial wellness and track improvements over time;
- Build a simple spending plan that is realistic for your situation;
- Prepare for a more financially secure future with forecasting tools and savings recommendations; and
- Connect to your bank so you can see real-time balances and transactions.
Even if you do not have access to such a tool, visit your local bank branch, meet with your financial advisor or talk with your accountant. To get where you want to go, you first need to understand from where you are starting.
Are you financially well?
Financial wellness means different things to different people. But people who consider themselves financially well typically have emergency savings, pay off their credit cards each month, make a habit of saving money, have a debt-to-income ratio less than 30 percent, budget well or spend wisely and understand—and plan to meet—their retirement goals and kids’ educational needs.
More concretely, four good measures of financial wellness are:
- Your credit score. You can get a free credit report from each of the credit bureaus through annualcreditreport.com, and there are a number of credit card providers who offer credit scores for free.
- Your retirement savings rate. The key word here is rate. This is not tied to a dollar amount, but rather what percentage of your salary you are investing into your retirement. The ideal rate to shoot for, according to most experts, is 15 percent.
- Your emergency savings fund. Ask yourself: how many months could you survive without income and still meet your expense needs through savings? 6 months is good. A year is better.
- Your net worth. This is the amount by which your assets exceed your liabilities—or the difference between what you have and what you owe.
Understanding these measurables can help provide a more comprehensive financial picture. Assess where you are today, financially, and then reassess your financial resolutions. Do your resolutions address the problem areas you’ve diagnosed? Do your resolutions help you long-term?
Take action, change behaviors
Remember, financial wellness is about action and behaviors. This should reframe the way you think about common financial resolutions.
Do you want to save more? Your resolution should be to develop a plan that will help you spend less and facilitate regular deposits into your savings and/or investment accounts.
Do you want to pay down debt? Your resolution should be to identify why you are accruing debt in the first place. Evaluating your budget is a good place to start.
Do you want to spend less? Your resolution should be about differentiating between needs and wants and detailing your income and expenses so you can build a budget.
At KeyBank, we talk about financial wellness in five steps.
- Understand where you are today.
- Take action.
- Build healthy financial habits.
- Monitor regularly.
- Celebrate each success.
Most New Year resolutions focus on steps three and four, which is why they fail. If you want to get to step five, celebrating success, you cannot skip steps one and two. Understanding your starting point and taking the necessary steps to act financially responsible and build good habits are the bedrocks of meeting any big financial goals you set for yourself—for 2018 and beyond.
About the author: Ruth Mahoney is regional retail leader and president of KeyBank’s Capital Region. She may be reached at either 518-257-8619 or [email protected]
Six financial goals
If financial wellness is the journey then what is the destination?
Similar to the resolution to eat better and exercise more, the outcome of focusing on improving your financial wellness is excellent overall financial health. LearnVe$t offers goal-oriented outcomes in their article, “Six telltale signs you’re in great financial health.”
- You’re a two-income household—but can live off just one.
- Your net worth exceeds your annual income—and keeps growing.
- You can name what’s in your investment portfolio.
- You neither owe nor get a refund at tax time.
- Less than a third of your income goes toward debt.
- You’re done with car payments.
These are great goals—celebratory goals. They can only be achieved through successfully completing a series of steps. Save a little more. Check your balance a little more often. And finally, spend less time focusing on the destination and more time taking actions and building healthy financial habits. The progress you make will feel great. More important, your goals will become within reach.