Ep.86- How to Reflect on Your Finances in the New Year: Ask Yourself These 8 Questions
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Read Time: 5 Minutes
Is your New Year’s resolution to improve your finances in 2020? If so, ask yourself the following 8 questions, as these questions will help you reflect, provide the advice and resources that can lead to concrete actions you can take.
1. Do You Have a Budget?
Why It Matters: I recently re-watched the movie, “All the President’s Men”, and still remember it when the investigator famously said, “follow the money” as a key insight to finding out the truth in the Watergate investigation. When it comes to personal finance, having a budget is basically the best way to follow your money. Once you have a budget, you may be shocked by how much you spend on things you don’t care about. If that’s the case, it means you should reduce it or cut it out completely, and spend on something that matters more to you instead.
Actions to Take: Start a budget if you don’t have one. Review/update it every month as your income or spending change. Try to save 20% of your take-home pay (aka after-tax) every month.
Resources: To get yourself started, you can download the budget tool from my earlier episode: Ep.10 How do I Budget. There are detailed instructions in the article.
2. Are You Tracking Your Spending?
Why It Matters: People often say “what’s measured will be improved”. I strongly believe this saying holds true in personal finance. When you track your spending, you actually see the actual dollar amount. Seeing is believing. In a way, tracking helps us become aware of the old subscription you never canceled, or the Amazon product you bought but never used.
Actions to Take: Use a free automated tool to track your spendings at least once a month. If you can, do it once a week.
Resources: I personally use Mint, a free online tool (and an app) that helps you track spending with ease by linking all your accounts into one place. It comes from the same company that makes Turbo Tax. With this tool, you can easily find out whether you spent $200 or $800 on eating out last month. I have also tried several alternatives, including Clarity Money, but none of them is as good as Mint in my opinion.
3. Are You Taking Advantage of Your 401k Match?
Why It Matters: Your 401k Match is free money your company is trying to give away to you! By not getting the match, you could be eaving free money, possibly thousands, on the table.
Actions to Take: There are 2 numbers associated with a 401k match: a match on contribution and a match on the dollar. For example, an employer may match up to 8% of your contribution with 50% on a dollar, or up to 3% of your contribution with 100% on a dollar. What you need to do is to at least contribute to the highest percentage amount the company matches, which means 8% and 3% respectively in these two examples.
Resources: You can learn more details from Ep.31 How Much Do I Put into My 401k.
4. Do You Use Automatic Transfer to Savings Every Month?
Why It Matters: Pay yourself first! Saving money should be treated as a high priority, just like paying rent. In other words, it should happen at the beginning of every month along with paying rent, before all other purchases. By automating monthly savings, you remove the barriers to pay your self first.
Actions to Take: Automatically transfer a set amount to your savings account on the 2nd of each month. Do it once a month no matter how many times you get paid every month. Start with at least $100.
Resources: It’s totally fine to transfer to whatever savings account you may already have. However, you should consider a high-yield savings account that pays somewhere between 1.5% and 1.9% instead of the 0.05% from your traditional banks. Here’s a good list to check them out. Additionally, Credit Karma also recently launched a high yield savings account at 1.8%, which I recommend for its reputation and high interest.
5. Is Your Health Insurance Actually Good?
Why It Matters: Picking a health insurance at work is a terrible process, an annual event with a short window. We do it and forget it. In fact, most people don’t really know what they are getting until they need to use it. By understanding what’s a good health insurance plan ahead of time, you can save money down the road when you have to use it.
Actions to Take: If you already have insurance now, there’s nothing for you to do because the enrollment period is over. However, you should read to understand the 5 key health plan quality explained in Ep.84 How to Pick a Good Health Plan, so you know if yours is actually good compared to what’s out there.
Resources: You can learn more about how to pick a good health insurance plan from Ep.84 here.
6. Do You Already Have an Emergency Fund?
Why It Matters: Life happens and it can be very stressful. For example, your car may break down, you may be laid off at work, you may need to help your family out financially. In these situations, an emergency fund can prevent a difficult situation from becoming a stressful financial disaster.
Actions to Take: Consistently transfer money into savings automatically until you have enough to cover 3 months worth of your monthly spending. Again, this is 3 months of spending, not 3 months of income. For example, if you learn from your budget that you spend $3,000/month, then your emergency fund should be $9,000.
Resources: There isn’t really any magic bullet on savings, so I personally don’t have any tips. However, Dave Ramsey has a list of tips for you to get started. It’s nothing you don’t already know. But it may help jog your memory.
7. Are You Paying More than the Minimum On Your Debt?
Why It Matters: In general, debt costs you more the longer you wait because you pay more interest over time. This especially applies to your car loan, student debt and credit card debt. For this reason, you should pay them off as soon as possible. The single best way is to tackle it is by paying more than the minimum every month.
I would pay more than the minimum on all debt except for mortgages. Mortgages are an exception because houses typically appreciate in value over time, thus potentially making up for the interest you pay on a mortgage in the long run. However, if you have the extra savings after paying off all other debt, I don’t see a reason to stop you from paying off your mortgage early.
Actions to Take: Tackle it head-on. Pay more than the minimum every month. If you have credit card debt, a car loan and student debt, pay off your credit card first before all others, because it has the highest interest amongst all 3 types.
Resources: Dave Ramsey has a good article on how to pay off debt the smart way here.
8. Are You Investing Your Extra Savings Outside of Your Emergency Fund?
Why It Matters The value of money is like the charge in a car battery. Money naturally loses value a little every day through deprecation, just like a car battery loses its power a little every day through discharge. After you saved up 3 months’ worth of emergency fund, you should invest the rest of your money to make it grow. As for your emergency fund, you can put it into a high yield savings account, but don’t invest it, because the job of an emergency fund is for emergencies, not growing.
Actions to Take: After saving up for an emergency fund, grow the rest of your money through investments. The common investments are real estate, stocks, bonds, and education/certification that will help you make more income.
Resources:
Investments: If you are new to investments, you can learn the basics from my Ep.36 - How to Invest Your First $1000. I recommended Scottrade back then. It’s now part of Ameritrade. I still recommend Ameritrade. I use it myself.
MBA Degree: If you plan on getting a higher education, specifically an MBA, you should really calculate the return on investment first via Ep.57- The Ultimate MBA ROI Calculator to see how long it will take for you to recoup your investment.
First House: If you are looking to buy your first house, you can read Ep.25 - How We Bought Our 1st House in LA for some insights.
Investment Property: If you are looking to buy an investment property instead of a house you live in, Ep.65- Investment Property Checklist will help you get started.
Pick One and Do It
To truly improve your financial health, you need to make it a priority and take action. Having gone through these 8 questions, choose 1 and make it a priority in 2020. If you are new to personal finance, I highly recommend starting with a budget and/or signing up on Mint.