New Year's Resolution Dos and Don'ts
The New Year is right around the corner. I know, some of you haven’t even shaken off the Christmas onslaught yet but there’s always another holiday. This one is unique in that it’s almost entirely self-centered, but in a good way. This is the time of the year to start working towards self-improvement. Many people focus on their environmental impact, health, or retirement, but they all can impact you financially. Let’s walk through a few cases many people fall victim too when trying to do the right thing.
Gas Mileage Trap
Don’t let gas mileage be the only factor if you’re looking to get a new car. Many people will look to lower their fuel consumption in the New Year and there’s nothing wrong with that. The unfortunate part is when people end up costing themselves money by trying so hard to get a fuel efficient car. If you sell your truck that gets 15 mpg for $5,000, then turn around and buy a $15,000 car that gets 30 mpg, you would need over 10 years to make up the difference in fuel costs. The 10 year number is only accurate if you don’t invest that extra $10k you had to pony up for the new car. If you invest that money or simply avoid paying interest on a loan to come up with the extra $10k, the fuel savings may never pay off regardless of time. The decision will obviously depend on your commute and the prices involved, but please do the math. I let this same decision push me into the purchase of my car even though my monthly fuel bill is only about $60 a month. Do better than me, do the math.
Get Ripped, Not Ripped Off
The most common resolution I see from people is fitness. I normally save my fitness onslaught for the summer personally. Better fitness is a goal everyone should have, especially the financial independence community. If you’re going to work hard to retire early, you should definitely take care of yourself so that those older years are as productive and enjoyable as possible. The problem is too many people jump straight into an expensive yearlong gym membership. Again, it’s not a bad decision if you know you’ll use it. I would suggest taking the first few months of the year and challenging yourself to do some at home workouts on a regular schedule for two months. If you stick to that schedule, reward yourself with the membership. Make sure you have something you’ll actually take advantage of. This goes for any new hobby you’re looking into. Put down the $2,000 camera and $1,500 REI haul until you know you’ll make time for those purchases to be worthwhile.
Prioritize Happiness, Not Percentages
The last thing to be wary of is deprivation. You’re going to set some tough goals for yourself and that’s a good thing. Just try to make sure you’re focusing your energy in the correct place. A truly ideal budget gives you everything you need plus a ton of happiness. I don’t believe in cookie cutter answers like 25% for housing so I don’t think you should shoot for an arbitrary goal like 10% reduction in spending. Some would say that I’m irresponsible because about 25% of my spending is for travel and entertainment, but at the same time I save 70% of my income. Numbers are tricky, so be careful. You’re going to set your overall spending goal based on how you want to live your life and your realistic current income situation while your resolution should be based on optimization. Go back and take a look at where you spent your money this year, circle those non-essential items that you completely forgot about, and think about cutting those next year. With personal budgets, unlike the stock market, past performance is a great indicator of future results. Don’t limit yourself or set yourself up for failure by trying to reach for a random number. Reduce your spending in a thoughtful manner and maybe even increase spending in some areas you’ve been neglecting if they increase your health and happiness.
The Best First Step Is a Starting Point
We walked through a few things you shouldn’t do, but it’s the New Year and you still need that resolution right? My number one suggestion for people making any of these decisions is to set a baseline. To do this, you need to seriously track your spending. If you’re responsible, a credit card is a great way to keep up with all your transactions and earn some extra points. If you don’t feel comfortable with that, try a debit card or use cash but you’ll need to write down transactions more frequently. If you know how much you spend on gas, you can make that car decision. If you see all your wasteful spending, you’ll know exactly where to attack. If you see a lot of gym fees, but you never go, it’s a good sign that a membership isn’t going to fix things for you. If you get a good idea of where you currently are, it’ll make those resolution decisions a lot more clear and useful in the future.
Want a template to get you started with budget tracking? Download my free one and let me know if you have any issues. Good luck out there and let everyday be one day closer to ultimate happiness.
More resolution suggestions:
1. Set-up auto draft investing
2. Supplement short trips with a bicycle
3. Bring your lunch at least 4 days per week
4. Investigate the fees on your investments
5. Go take an AFF Skydive jump, you’ll thank me later