Five Financial Resolutions for 2010

The beginning of a new year is an excellent time to initiate changes in your life. It’s a new beginning – a time to get a fresh start. Here are five ideas for resolutions that you can make that could make your financial life, and your overall life, better.

1. Clarify your goals. Everyone should have a very clear set of written goals – long-term and short term – that capture what is important to them in their life. Create that set of written goals now and review them regularly. Your goals should cover all aspects of your life, not just the financial aspects. Your written goal statement might address questions like these: When do you want to retire? What will your retirement life style be? What is the legacy that you want to leave (to your family, friends or your community)? Are there any big purchases coming up (a new house, a new car, a remodel, a boat, etc.)? What are the values you want to leave to those of importance to you? Do you have anyone you want to help through college? Are there places you want to visit, or things you want to do in the next twenty years?

My blog from January 1st (New Years Questions) presented an exercise that can help you get started in clarifying your goals.

2. Know where your money comes from and goes. Everyone should have a system that will allow them to know where their money came from and went over the past year. What were your sources of income? How much did you pay in taxes? How much did you put aside for financial independence? How much did you spend for insurance, dining out, groceries, all of the costs associated with living in your home, interest on bad debt, etc? Having this information available is key to understanding if you have a good plan to achieve your goals, identifying problem areas, making plans to improve problem areas and to making good decisions about your future. Mint.com provides a great (and free), easy to use, tool for capturing this data. Quicken also provides great capabilities.

3. Live well within your means. Without a doubt, one of the key’s to financial peace of mind is living within your means – save for the future, avoid all bad debt, and adapt your life style to what you earn. I am now suggesting that living WELL-WITHIN your means (saving more) is a great idea. This strategy gives you more freedom in how to live your life – now and in the future. It also allow you to learn the joys of living more simply. Knowing where your money goes (resolution #2) will aid in this effort.

4. Eliminate bad debt. Make this the year that you pay off all credit card, car loans and other “bad” debt (or at least implement a plan to do so). Virtually all debt outside of student loans and mortgages can rightly be considered ‘bad debt’. Make 2010 the year that you will pay it off and begin a new financial chapter in your life.

5. Make sure your emergency fund is adequate. Everyone should have an emergency fund. I recommend that you actually have two emergency funds – both invested in very safe and liquid fixed-income investments – savings account, money-market accounts, etc. The first emergency fund should equal 10% of your annual income. This is for the true (and normal) emergencies – unexpected car problems, home damage, etc. The second emergency fund should equal 20% of your annual income and should be inside of an IRA, 401k or other tax-advantaged account. Chances are that you will never have to use this and by having it in a tax-advantaged account, you achieve significant tax savings.

I will have five more resolution suggestions tomorrow.

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