Some people wake up on Jan. 1 well rested, ready to take on the New Year. Others wake up fully dressed, on their couch, blanketed in receipts from the bar the night before. Regardless of how you feel when your alarm rings you into 2016, chances are better money management is on your list of New Year's resolutions.
The best, and most achievable, resolutions are one time fixes that become automatic behaviors -- clicking a few buttons once is a lot easier than maintaining a gym regimen or committing to a weekly juice cleanse.
Thankfully one of the items on my list below is just that, practically guaranteeing success, the others require some paperwork and upfront effort, but once they are submitted, the work is out of my hands.
So if you're looking for three easy financial fixes for 2016, here are my resolutions.
Resolution 1: Roll over my old 401(k) from a previous employer into a traditional IRA
The beauty of 401(k) is that you simply set your your contribution percentage, select the funds you want to invest in and forget it. It's about as painless and passive as investing can get.
But that set and forget approach can be dangerous -- as you switch jobs throughout your career, you might not keep tabs on your old retirement accounts from previous employers... and the expensive management fees they charge.
In doing an end-of-year check in, I realized the 401(k) account I'd set up with a previous employer had my money in a mix of funds, including some with expense ratios of 1% and 2%. I don't have much in the account, but I still couldn't believe how much I'd been paying these fund managers to manage my money (and underperform the market).
I'll be converting my old retirement account into a traditional IRA, where I can allocate my money to index-tracking funds with low expense ratios.
Resolution 2: Up my current 401(k) contribution by 1-2 percentage points
When it comes to 401(k) contributions, the golden rule is "make sure you max out your employer's match," and the logic is pretty simple, why leave free money on the table? But beyond that, the "right" amount to contribute is tough to nail down.
Say you make $50,000 a year and your employer matches 50% up to 6%. You would be contributing $3,000 per year and enjoying a match of $1,500 from the company, but that would still leave you well below the deferral limit of $18,000 per year. Unless you have something you're setting aside money for like a house or car or have debt to pay off, adding an extra one or two percent to your retirement contribution each paycheck now could mean a difference of tens of thousands of dollars in your 401(k) when it's time to make withdrawals.
In the preceding example, the decision to up contributions from 6% to 8% would mean an extra $1,000 in your 401(k) in 2016 -- at an average annual return of 5%, the added deferral would put an extra $4,000 in your retirement account in 2046. If you continue to sock away that extra $1,000 every year for 30 years, this small percentage point increase adds more than $60,000 to the total value of your 401(k).
For budgeting purposes the increase in contributions would only feel like having $750 less in your checking account at the end of the year due to taxes if you're a single-filer.
Even though I already max out the Fool's generous match, I'm planning to increase my 401(k) contribution by at least 1 percentage point for 2016.
Resolution 3: Make a Roth IRA contribution
In 2014, I moved, outfitted a new apartment and enjoyed plenty of dinners out making friends in a new city, so I didn't have a lot of extra cash sitting around. But 2015 was far more stable, I was able to save more and have exceeded the amount I feel is necessary for my rainy day fund.
I could take that extra cash, add to the traditional IRA I plan to set up with my 401(k) rollover and lower my 2015 tax bill, but frankly I have no idea what my income will look like in retirement. With part time work or changes to the tax code, I could wind up being in a higher tax bracket in my 60's, so splitting my funds into a few different tax strategies by making a Roth IRA contribution makes sense for me now.
I probably won't hit the $5,500 contribution cap, but anything I am able to add now will offer tax-free income in retirement.
All told, I'm hoping spending one day in January 2016 making these financial moves will have me waking up happy Jan. 1, 2060 -- whether I make it to my bed or fall asleep on the couch.