As we close out 2020 and enter 2021, most of us are anxiously awaiting a happier year ahead. Traditionally, we mark the fresh calendar year with New Year’s resolutions to keep us hopeful and motivated — particularly when it comes to our finances.
If all goes well, by this time next year, you’ll be posting on social media about how you crushed your 2021 #goals.
But that post will be a lot less likely if you set resolutions that aren’t attainable in the first place.
To increase your chances of success, here are three financial resolutions to avoid this year — and some better alternatives instead.
Spend less money
It’s probably the most basic financial goal: spending less. But as well-intentioned and financially responsible as it sounds, it probably won’t yield the greatest results over the next 12 months.
“Focus on savings goals as opposed to budgeting goals,” says Taylor Venanzi, certified financial planner and owner of Activate Wealth in Philadelphia. “And then you kind of back into your budget from there.”
If you really want to save more money in 2021, make it your mission to set aside a specific percentage of your income each month, Venanzi recommends.
This approach will help you spend less by taking savings off the top. Working from a percentage — say, saving 20% — is also beneficial because you won’t be comparing yourself with anyone else. Someone else may save $500 a month, but you can calculate and save a dollar amount based on your own income that works for you.
Just make sure you’re actually saving money rather than just rearranging it, says Sean Rogers, CFP, owner of Capital Stewardship Partners in Grand Rapids, Michigan.
For instance, if you’re putting more money in savings each month but then charging more to your credit card to make up for less money in your checking account, you’re not actually saving more.
Pay down debt
Like saving money, paying down debt sounds like an important resolution. And it is.
But it’s actually more important to make a plan for attacking that debt. While your debt repayment strategy is a personal decision, for most people, Venanzi recommends focusing on paying down your high-interest debts. Or, you could get even more granular and resolve to work on debts above a certain interest rate.
If you have more than one high-interest debt, check for variable-rate debts. Be aware of these because the interest rate could jump in the future.
Once you take inventory of your debts, pick a debt payoff strategy and make that your New Year’s resolution.
Plan for retirement
Here we go with ambiguity again. Sure, thinking ahead to retirement is smart. And you should 100 percent be doing that. But “staying on track for retirement” doesn’t exactly qualify as a great resolution.
A more specific goal would be to say that you want to retire at age 65 without compromising your current lifestyle, Rogers says.
Using that as your guideline, you’ll have an idea of how much money you need in retirement and can take steps to work toward that target.
So in 2021, your retirement resolution may actually be along the lines of: Organize my financial documents. Set up a balance sheet and income statement to track my spending and saving. Commit to a long-term savings rate.
If you follow through with these and other actionable steps, you’ll be on track for your ultimate goal.
Goals aside, make a plan
Any financial resolution can be good or bad, depending on if you have a proper plan to execute it, according to Kyle Hill, CFP, owner of Hill-Top Financial Planning, LLC in Kansas City, Missouri.
“Buying a house, getting a new-to-you car or even getting out of debt — these are all great goals,” Hill says. “But if you don’t have a plan for achieving those, I think that’s where you can kind of get into trouble.”
Rogers says a reliable way to get where you want to go is to look in the rearview mirror first.
Say you’re creating a budget to track your spending. You wouldn’t just guess how much you plan to spend each month on various expenses. It’s a better idea to pull up your credit card and bank transaction data from the past year to see how much you actually spent. Use those figures as a baseline.
Another helpful tool? Hill and Venanzi both recommend an accountability partner, like your spouse, colleague, parent or someone else who knows your objective. Check in on your progress every other month for short-term goals and annually or semiannually for long-term goals.
So go ahead, make a plan to crush those 2021 resolutions — and then make it happen.