I am a fan of establishing big, audacious goals. But when it comes to New Year's resolutions, we are typically setting ourselves up for failure.
Money is stressful.
It's no wonder that many New Year's resolutions are financial related. Money is a major cause of stress for Americans and a big cause of divorce. Poor financial habits are a big cause for concern.
But when we speak of improving our finances, we speak in terms of things we need to do. Just consider the following typical New Year's resolutions:
- Cut up our credit cards (and make a commitment to not using them again)
- Get a new higher paying job
- Save money and build an emergency fund
- Pay down consumer debt
- Buy a house
- Start a business
While these may be great accomplishments, they are all actions you must take. But I am not talking about actions. I am looking to change your mindset. That's why your only financial goal for the new year should be to live below your means.
You see as a nation we have a spending problem. In my decades as a CPA, I have advised people from all income levels. One thing is for sure, we tend to spend what we make. The client who makes $1 million a year tends to spend all of it, just like the client who makes $50,000 a year.
In fact, I have a client who makes over $1 million a year and always complains to me that she can't put food on the table. I know that she is exaggerating a bit, but you get my point.
So how far is enough?
How far below your means should you live? I recommend starting with 10 percent, but I have clients who save in excess of 50 percent. Whatever your goal is, you must make that commitment. Make sure that after you pay your bills you have this minimum amount left over.
This one rule will address all the other financial resolutions. For example, this extra amount may allow you to pay off credit cards, start an emergency fund, buy a rental home, build your investments, start a business, etc.
Unfortunately, we often believe that if our income goes up our spending should go up as well. If we get a raise at work or our business is doing well then we should turn around and buy a new car or a larger house. I, for example, have been living in my house for almost 16 years even though my income has increased over that period of time. Should I have bought a larger home because I "deserved" it? I think not.
Focus on your net worth.
We focus too much on our income and expenses and too little on our assets and liabilities. Net worth is what really matters. Assets are all of the things that you own (your home, furniture, investments, retirement accounts, etc.) and your liabilities are what you owe (student loans, mortgage, credit cards, etc.). Subtract your assets from your liabilities and hopefully this is a positive number. If it's not, living below your means will help.
I admit it. Changing your financial mindset can be really tough. But to accomplish what you want financially, it is critical. If you live below your means, the rest will take care of itself. Make it your one and only financial resolution.