Remember a few weeks ago, when you woke up on New Year's Day freshly motivated to save more money, track your spending, clean out your filing cabinet, and finally organize the basement? It's time to reignite some of that enthusiasm and remind yourself about the items on this year's to-do list.
If you've read the first part of this article, you may have already roused yourself from the old movies or the video games and done a few calculations to look at your net worth. Take a moment to ponder what those numbers mean, and you might add a few things to the list of goals that you'd like to accomplish this year.
But you can also set goals without calculating your net worth. You may already have a good idea of the financial holes that need patching, the accounts that need tending, or the debts that need paying.
To get your goals accomplished, you'll need to start the year with a spending plan. Think of this not as a budget, with all of its associations of generic spaghetti and reused paper towels. Instead, think of this exercise as a road map for turning your dreams into reality. That's much more poetic, don't you think?
Start with your income. Working on a monthly basis, figure out how much income you'll have after taxes and any contributions to your 401(k) or other pre-tax retirement plan.
Now, before you do anything else, look at your goals. Do you want to make a full $4,000 contribution to an IRA this year? Subtract $333.33 from your monthly income to represent your monthly IRA contribution. Do you want to save $2,000 more for your child's education? Subtract $166.67 from your monthly income to represent this deposit.
Let's say you want to pay down your debts. If you have a $5,000 credit card balance that you want to see disappear by the end of the year, subtract $444 from your monthly income to represent your credit card payments. (Use the calculators in the Fool's Credit Center for more help with these calculations.)
Maybe you want to make an extra payment toward your mortgage this year. If you're paying roughly $1,500 a month, subtract $125 from your monthly income to represent the amount of money you'll have to set aside each month to make that extra payment in December.
You've probably figured out the strategy by now -- identify your goal, and make that money disappear. Take that money off the top before you've ever had the chance to do something else with it. By doing this while drafting your spending plan, you make sure that your goal doesn't get forgotten or squeezed out by something else. You can even do this with your real money by having the cash withdrawn from your account on payday, before you've ever gotten a chance to spend it.
You may also recognize that this is a variation on an old theme -- pay yourself first. After all, you and your family are the reasons you're trudging to work every week to bring home that paycheck. By making your financial goal your top priority, you're assuring that your hard-earned dollars meet your priorities.
Now that you know your income, and how much of your income you'll devote to your annual goals, it's time for everything else.
Work the rest of your needs and wants into your spending plan, starting with necessities such as the mortgage, real estate taxes, medical costs, food, insurance, and basic utilities. Then move on to the more flexible spending categories, including household expenses, entertainment, dining out, hobbies, vacation, cable, movies, clothing, and fancy haircuts.
Where can you find all of this information? It's all in your checkbook register, or your checking or credit card account statements, or your stack of paid bills. Look over the last couple of months to identify the trends in your spending.
Coming up short? It's time to get creative. Don't touch the money you've devoted to this year's goals. Start at the bottom of the list, and think about ways you can squeeze your spending on things you'd like to have but don't really need. Get rid of things that you don't need and bring you no pleasure, like the premium cable channels you never watch. Try trimming each category a little bit, and you'll feel less pain.
Now, take a step back from your plan. Does it look as though your money will go toward your priorities this year? Will you end the year celebrating that you've reached your goals? Will you spend your discretionary money on things you really enjoy, instead of things you've become accustomed to having? To make sure these predictions come true, read the next part of this series for some ideas to help you track your spending and stick to your plan.
Keeping your resolutions can help you get that much closer to having a happy and worry-free retirement. Robert Brokamp can help you, too, with his Rule Your Retirement newsletter service. Check out his advice for successful retirement planning by signing up for a free trial today. There's no obligation to buy.