Are you setting New Year’s resolutions in pursuit of being a better version of you? Health and finance are two common areas of resolution focus. When it comes to being healthy, people often resolve to sit less (move more), eat more nutritious foods, and of course exercise. On the personal finance side, the most common ideas are to spend less and/or save more. Sounds simple, but how can we make the resolution more intentional and enhance the probability of success… and your long-term financial “journey”?
For Nvest clients, a familiar question we ask at the beginning of almost every investment review meeting: “is the investment plan (objective) still valid; has anything changed?” Has the purpose or time horizon of the money in your accounts materially changed since the investment objective was last set/adjusted? Losing sight of how much of your money in each account which can comfortably remain longer-term, can dramatically reduce the growth of your assets over time. Recall, your investment mix is the biggest driver of your return experience. It’s not about timing the market (getting in or out), what securities you own, or other factors… it’s all about what proportion is held in stocks, bonds, real estate, cash, etc. To the extent time (we define as 5+ years) is available, money can remain growth oriented.
So, how can one save more and make the most of time on their side? And, where should savings occur to optimize growth AND flexibility? A few ideas:
- Are you eligible to contribute to an HSA (health savings account)? If so, this should be of high priority if you can largely avoid utilizing it for current health expenses. That’s because HSAs are the only “triple tax advantaged” account that exists. Money is contributed pre-tax, can be invested and grow inside the account tax-deferred like an IRA, and is tax free upon withdraw anytime for health-related expenses. This strategy advocates investing the monies in a growth-oriented mix until retirement with the resulting accumulation being quite large; not spending the money annually. Even if you do not use the account for health expenses down the road (which seems unlikely considering how expensive is healthcare), withdraws in retirement will be treated the same as your traditional IRA.
- Did you get a raise? If you are not already maxing out your retirement account contributions, give your retirement account a boost as well. 401k and 403b contribution limits increase in 2022 – now $20,500 for individuals; individuals over age 50 can contribute an additional $6,500.
- Consider also using your raise to increase your after-tax savings in personal brokerage accounts. Saving after-tax money is one of the best ways to enhance your financial freedom both now and someday in retirement. Those with only pre-tax savings often observe quicker consumption of their investment assets, and fewer strategies to control taxes in the future.
- Spend less. Sounds simple, but difficult if one lacks the detail where spending is actually occurring. Consider developing a simple spending plan (aka budget). Then, track your spending against it (our LIVING LIFE client portal can largely automate this!) . Comparing your budget to where money is actually flowing can help you assess whether your spending matches your priorities (needs, wants, luxuries, and help identify areas that you otherwise consider “waste”).
- Hoard less cash – thoughtfully review and set guardrails at the bank. How much cash is too much? Consensus tends to center around keeping 3-6 months of living expenses in cash. More than that for most people is likely unproductive. If you experience a regular monthly surplus, set up automatic transfers into your investment account. This is also a way to reduce the emotional obstacle that can arise when one is considering moving a large lump of cash that’s accumulated at the bank into investments (moving size creates a “time” of worry?). For most people it feels more daunting to deploy large amounts vs. several smaller ones.
Some final thoughts as you consider your resolutions for 2022. What causes individuals to fall short in regularly saving or straying from their optimal goal? It often boils down to near term uncertainty and emotion created by noisy news. Thus, resolve to consume less news. Remain aware of what’s going on, knowing that there was never a time absent of worry (for life or financial markets). Consider disabling push notifications on news apps and limit the TV & talk radio. Do your best to automate and be regular in your savings. Time is your greatest ally. Keep focused on your goals, and realize that there will be uncomfortable moments along the journey; worry less about what you hear friends or colleagues doing. These things can interrupt or impair achieving your financial goals and achieving peace of mind. “There’s something HOPEFUL about going into The New Year knowing good people are on your side.”
-Steve Henderly, Nvest Wealth Strategies, Inc.