It's the new year, and you know what that means: Resolution time! Since The Motley Fool is a financial website, I figured I'd share my top financial resolutions... Seemed appropriate, somehow.
My top three financial resolutions are below. I'm motivated by efficiency, so I've also broken down how much I'd estimate each of these is worth in money, how much it will cost in time, and therefore how much I'm "making" per hour I spend on these resolutions.
So, without further ado, my new year's resolutions.
1. Understand the home-buying process (preferably before buying a home).
My wife and I are currently saving up to make a down payment on our first house this year. It'll be exciting to live in something other than a cramped one-bedroom apartment, although we will miss the included utilities. Let me tell you, the AC is on blast during the summer.
We'll be putting down 20%, which is great on its own: That means we'll avoid private mortgage insurance (or PMI) -- the bank's insurance that, if someone with less than 20% equity walks away from the house, they're still able to recoup their investment -- which adds to monthly payments without generating any additional equity.
But, frankly, there's a lot more to learn, for example: What questions to ask our realtor (we haven't picked one yet), the inspector, and the seller's agent. My wife and I will be taking a home buying class to get us started, and then it'll be time to interview realtors and talk to loan officers, with the plan being to purchase a home sometime in the back half of this year.
Time estimate: The class itself will take around eight hours. I would guess that further research and picking realtors/loan officers will tack on an additional 100 hours of time. (Hey, it's a big financial decision. We should give it the time it deserves.) That's not time spent finding a house, by the way, but rather time spent doing due diligence around the concept of finding a house.
Payoff: Some mortgage programs offer mortgage rate reductions for taking homebuying classes. A one-eighth of a percent reduction in a $350,000 mortgage is worth a $5,796 interest reduction over a 30-year loan term. I would guess that asking smart questions at inspection time and picking a good realtor are worth a combined additional $10,000 in savings on repairs/getting a good deal on a house.
ROI: Assuming the numbers above, approximately $146 per hour spent.
2. Take the time to grow my stock portfolio.
Last year I realized I had a big problem with buying stocks: I wasn't doing enough research beforehand. I had bought a number of stocks based on tips and had done a pretty shoddy job of developing an investing thesis...and it was seriously hurting my returns.
This isn't a phenomenon unique to me, by the way – men on average underperform women by a percentage point annually in the stock market, and men are more likely to blindly purchase a stock based on a tip from a friend.
I helped control for that tendency by designing a more rigorous process for analyzing stocks for potential addition to my portfolio. I am significantly more confident in the stocks I bought last year than in those I purchased previously.
Of course, that process is time-intensive – up to eight hours per stock I'm considering. My goal this year: Make time. I want to analyze at least one stock per month for potential addition to my portfolio and get in the habit of doing the work each quarter to make sure that I should keep the stocks I currently have.
Time estimate: Fifteen hours per month, for the foreseeable future. Eight hours for potentially buying a new stock, and seven for checking in on current holdings.
Payoff: Based on my current stock portfolio size (that is, excluding 401(k)s) and some reasonable assumptions about future contributions, a one percentage point difference in my performance over the next 20 years should be worth around $160,000. That seems a good goal to shoot for.
ROI: Assuming the numbers above, roughly $44 per hour spent over the next 20 years.
3. Get a credit card that aligns with my spending habits.
My father-in-law is retired military, so I have access to Navy Federal Credit Union's fantastic services. If you can believe it, their checking accounts pay a dividend! It's not much, but hey, every $0.11 helps.
My wife and I have used the Navy Federal Flagship Rewards credit card to cover every bill we can over the past five years. We use the points (two per $1 spent) primarily for plane tickets to far-off places. The key question: Is this the best rewards card for us?
Maybe. And I'm going to figure it out.
The problem is that comparing two credit cards can feel like you're staring at an apple and an orange. So I have to do a fair bit of back-of-the-envelope math based on where and how we spend our money. Since we're using the points for travel, your assumption might be that we should get a travel rewards card. However, most of the travel rewards cards seem to give you the big payouts when you charge to them while abroad. And here's the problem for us: We don't actually spend that much time abroad. We just like free plane tickets when we do.
Maybe one of the general cashback cards would be a better deal. If they offer attractive travel rewards, the 1.5% or so cashback that we could earn would be compounded.
It's a lot to think about. And I need to consider the potential impact on homebuying, so that's a conversation for the loan officer.
Time estimate: Three hours.
Payoff: Hard to say. But at three hours, it's worth just getting it done.
ROI: Unknown. Aside from getting rid of my sneaking suspicion that I may not be getting the most out of my credit cards, and that's peace of mind that would be priceless to me.
What this means for you
Find what motivates you. Is it the idea of earning money by the hour? Is it the total amount of money that you could save/make by keeping to a financial new year's resolution? Is it the peace of mind of knowing you're doing all you can? Measure your success by that metric and use it to hold yourself accountable. Most importantly: Use this extra new year's resolution energy to find some way to make your life financially better.
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