People often neglect their finances because “it’s too much” or “it’s too hard.” Yes, it’s true that there are many components of money and some parts of finance are hard, but personal finance – your money – doesn’t need to be complex.
The secret is, as Jim Rohn said, “Success is a few good habits repeated every day.”
It’s not the perfect stock pick you hear about on the nightly news. That’s news because it’s rare. It’s not a windfall of cash from having a large income or winning the lottery. Sixty-percent of professional athletes and 70% of lottery jackpot winners go broke.
It’s the smaller, recurring steps taken regularly that mean the difference between success and failure. What recurring, habits can you practice for your financial success? Try our eight recommendations for starters.
1. Automate your retirement investing
The robots are taking over, and in some ways that’s good. Such is the case with your money.
The best way to get the robots to help you is to set up automatic contributions into your employer-sponsored retirement plan. This is usually a 401(k), but could be a 403(b), Simplified Employee Pension (SEP), Savings Incentive Match Plan for Employees (SIMPLE IRA), Self-Employed 401(k) Plan or other.
Contributions are deducted, typically based on a percentage, from your pay. Your employer, which might be you, makes automatic, recurring deposits into your retirement account with pretax dollars. The residual comes to you in a paycheck or direct deposit into your personal checking or savings account.
The benefit to you is three-fold. First, contributions and investment purchases are both done automatically for you. This alleviates you from having to reaffirm each payday that, yes, you do want to invest in your retirement rather than your next vacation.
Second, these are tax-deferred accounts, which means contributions are made with pretax dollars and you’ll only owe taxes upon withdrawal. Therefore, your taxable income is reduced, which gives you more money to invest. If you don’t make withdrawals until after you’re 67-years old – the current retirement age to receive full retirement benefits – you’ll likely pay less in taxes than today. That’s because you’ll likely be in a lower tax bracket because you’ll have less earned-income in retirement.
Third, most employers match employee contributions up to a certain dollar amount. The amount varies by employer but many match between 50% and 100% up to a max percentage of your salary. This is the closest thing to free money as you’ll get. For your financial security, don’t miss out on it.
For 401(k)s and 403(b)s, recurring contributions, currently up to $18,500 annually, can be made to automatically invest into mutual funds and Exchange Trade Funds (ETFs). That means contributions automatically made into your account are automatically invested in mutual funds or ETFs pre-selected by you. You only need to review your retirement account and whole portfolio once or twice a year to maintain a proper asset allocation.
Contributions into SEP IRAs, SIMPLE IRAs and Self-Employed 401(k)s can sometimes be automatically invested in mutual funds that have an Automatic Investment Program (AIP). The limited automation capabilities are offset by the ability, to invest in individual stocks and direct bonds and to invest up to $55,000 a year, starting 2018.
To ensure your contributions into your SEP, SIMPLE or Self-Employed 401(k) are invested in a timely manner, use recurring reminders on your phone or computer to invest your contributions when they’re made. Optimizing automation and forgetting about your account, except for rebalancing, is a good start for increasing your financial security this year.
2. Use automatic 401(k) increases
To help more Americans prepare for retirement, retirement plans allow for automatic annual contribution increases.
It’s typical for workers to receive at least a one to two-percent annual increase in pay. It’s also typical for their cost of living to rise in direct proportion to their incomes. Successful savers and investors know that benefits of minimizing cost-of-living increases and rather increasing savings and investing.
When you sign up for a 401(k), you can choose your annual increase amount in addition to your starting contribution amount. The default is often set for a one-percent annual increase, but employees can reduce it to zero or increase it, as they wish.
To start improving your finances today, set your automatic contribution increase to, at least, 1%. If you can do more, it’s in your best interest to do so.
3. Choose dividend and capital gains reinvestments
Dividend reinvestment is often called DRIP, for either Dividend Reinvestment Plan or Dividend Reinvestment Program. Capital gains reinvestment is just called capital gains reinvestment.
Many equity investments, such as stocks, mutual funds and ETFs receive dividends. Dividends are monthly or quarterly recurring payments issued by the underlying company or companies based on financial performance. Dividends are usually issued as either cash or more stock shares. When dividends are issued as cash, investment holders may either receive the cash or have the cash automatically reinvested to buy more shares of that investment.
The benefit of DRIPs is the investor’s increased ownership in that investment and the compounding effect having bigger future dividend payouts due to increased investment ownership. That benefit is called compounding. Compounding essentially lets investors generate earnings on earnings, just as interest compounds on top of interest.
Mutual funds and ETFs also issue capital gains that can be automatically reinvested back into the mutual fund or ETF. Capital gains distributions are the profits a fund manager receives when by selling underlying positions in a mutual fund or ETF or the dividends and interest received the underlying positions.
Aside from annual or semi-annual rebalancing, the “set it and forget strategy” also applies here.
4. Improve your credit score
Having a good credit score can save you tens of thousands of dollars in your lifetime. That saved money will benefit you more in savings and investments than financing current and future debt.
The best way to improve your credit score is to start paying all your bills on time. Payment history makes up 35% of a credit score, per Fair Isaac Corporation (FICO), the creator of the most commonly used credit rating system.
The second-best way to improve your credit score is by reducing your credit utilization. That’s a fancy way of saying, reducing the amount of revolving debt you have relative to your credit limit. Experts claim that when you start using more than anywhere between 35% and 50% of your available credit your credit score will start to drop, and your interest rates will start to increase.
The next and possibly easiest way to improve your credit score is by correcting errors on your credit report. There are many reasons why incorrect claims and wrong information might appear on your credit report, such as a computer error, security breach and human error. All these errors can adversely affect your credit score. Therefore, you’ll see your credit score increase by removing and correcting errors.
Start cleaning your credit report by going to www.AnnualCreditReport.com or calling 1-877-322-8228 and asking for the free copy of your credit report from all three credit agencies (Equifax, TransUnion and Experian). All consumers are entitled to one free credit report from each of the credit agencies at least once a year.
For your security and to maintain low interest rates, make it a habit to review your credit report annually.
5. Invest 50% of your bonus
We often have grand plans for our bonuses. Whether it’s a vacation, home upgrade or fancy dinner, bonuses often disappear as fast as they arrive.
This isn’t to say you shouldn’t reward yourself but think of your reward in dual terms. Use half of your bonus to reward yourself today and the other half towards rewarding yourself in the future.
This is a significant habit to achieving long-term financial security. In the meantime, you’ll sleep better at night, and people rarely have buyer’s remorse from saving too much.
6. Contribute the maximum allowed into your Roth IRA
If you’re contributing enough money to your employer-sponsored retirement account to earn the full match, then the next financial habit to adopt should be to contribute the maximum allowed into a Roth IRA. For 2018, that’s an after-tax contribution of $5,500 if you have earned income and are under 50-years old and $6,500 if you’re over 50-years old.
This way, you’ll earn more money in a tax-deferred account with your employer match, and you’ll invest up to $6,500 annually in an account that grows tax-free.
If you’re fortunate enough to still have money to invest after qualifying for your full company match and maxing out contributions into your Roth IRA, then contribute the remaining in your employer-sponsored retirement account for the tax-deferred benefit.
7. Audit your spending
For most of us, it’s not so much how much money that’s coming in so much as how much money is going out. Regardless of your income, if you spend more than you make you’ll always be broke.
A good habit is annually or semi-annually auditing your spending to itemize where your money is going. If you have the time, this is best done on an Excel spreadsheet because you can itemize as granularly as you want. If that’s not possible, apps such as Mint, Honeyfi and Personal Capital each provide a higher-level itemization of their user’s spending.
When you do this, notice in what categories you’re overspending. Where do you spend that doesn’t align with your income, or align with your savings and investing goals? For most people, these are groceries, entertainment or clothes. For you, it could be something different.
Likewise, stop duplicating expenses. Most people today stream some or all their favorite television shows and don’t need cable, so cutting the cable is popular. If everyone in your family has a cell phone, you probably don’t also need a landline.
Once you know what’s out of alignment with your spending, you can rein it back in line with your goals. The more your spending stays on track, the easier it will be to reach those goals and be financially secure.
8. Break bad habits
A great way to adopt better financial habits to break bad habits. Habits such as smoking, eating junk food or overeating in general, not wearing a seatbelt or drinking in excess are all bad habits that are expensive in either the near-term or the long-term. By reducing or eliminating them, you’re keeping more money for your saving and investing, and that’s a good habit.
If 2018 was your year to get back on financial track and you’ve struggled since New Year’s Day, you still have time to achieve your goal and these eight habits will help you.