It’s the beginning of a new year, and you want to be smarter about your personal finances for the next 12 months and beyond. A popular New Year’s resolution is to start a budget. But success in personal finance is not just about spending less; it’s about making your money work as hard as (or harder than) you do. But what money moves can you make that can be smarter than starting a new budget you’ll probably abandon by spring?
While there are some timeless personal finance habits you can form now, there are some unique opportunities to watch for in 2020. Therefore, in this article, we’ll break down those two primary categories, starting with timeless tips, then we’ll cover the timely ones.
Here are some timeless tips for making your money work harder and for keeping more of what you’ve worked hard to earn:
• Educate yourself: Before making your money work harder, it always helps to learn more sensible ways to do it. Although this article may serve as a primer, a classic personal finance book is better! The Total Money Makeover by Dave Ramsey covers many areas of personal finance with simple and achievable money tips. Rich Dad, Poor Dad by Robert Kiyosaki is an interesting and biographical read about Kiyosaki’s financial mentor (the “rich dad”) and his biological father (the “poor dad”), each of whom helped him to form financial philosophies on building wealth. The Millionaire Next Door is full of anecdotes on how everyday people can apply simple, achievable rules to reach millionaire status in their lives. Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence by Vicki Robin and Joe Dominguez is an outstanding philosophical book on forming healthy perspectives on balancing money and happiness.
• Pay off high-interest debt: Not all debt is bad. Borrowing money to finance an appreciating asset, such as a home, is a good use of debt. However, the opposite is true: borrowing money for a depreciating asset, such as a vehicle, is not a good use of debt. Using a credit card to pay for depreciating assets such as clothes, or goods and services that are instantly consumed, such as food at a restaurant, and carrying your balance for months or years, is the worst use of debt. In fact, paying off high-interest debt can be better than investing in stocks. For example, if the debt has a higher interest rate than the expected return on an investment, which has historically been just under 10 percent annualized for a U.S. large-cap stock fund, then pay off the debt before you invest.
• Follow the ‘70/20/10 Rule’: You can give yourself a quick financial checkup by calculating your savings and debt payments in relation to your income. Financial experts recommend that no more that 70 percent of your income is used for living expenses, no more 20 percent of your income goes to debt payments, and at least 10 percent of your income is going to long-term savings vehicles, such as a 401(k) or IRA.
Here are some timely tips that are geared specifically toward your money in 2020:
• Refinance your mortgage: As 2019 began, interest rates were projected to rise during the year. But a slowing economy, plus uncertainty over the trade dispute between the U.S. and China, provided the Federal Reserve enough reasoning to reduce interest rates. By the fourth quarter of 2019, the average national rate for a 30-year fixed mortgage had fallen to 3.7 percent, down from 4.7 percent a year earlier. Most real estate professionals say refinancing a mortgage makes sense if you can lower your current interest rate by at least one-half percent and you plan to stay in your home for at least five years.
• Diversify investments: Although no one knows what will happen to stocks in 2020, it’s likely that the volatility of 2019 will continue. Any money you don’t need for at least three to five years can still be invested in stocks. Any money you don’t need for a decade or more should absolutely remain in stocks. If interest rates continue to fall, bonds won’t be attractive, but bond mutual funds can still see price appreciation (bond prices move in the opposite direction of interest rates). Certain commodities, such as gold, can also see price appreciation in this environment. Above all, don’t panic! Keep in mind that corrections and bear markets are natural parts of the economic cycle. Selling stocks in volatility almost certainly assures lower long-term returns. Your best bet, based on decades of stock market history, is to continue your investment plan in both good times and bad. If you’re concerned about falling stock prices, consider diversifying your portfolio with a broad market stock index fund, sector funds that invest in defensive areas such as healthcare and consumer staples, and bond mutual funds.
• Adjust your withholdings: Have you adjusted your withholdings since the tax law was passed in 2018? With changes in tax brackets and the child tax credit (for parents with child dependents under 17), you may have received a large refund this past April. Remember that tax refunds indicate that too much money is being withheld from your pay (and that you’re giving the government an interest-free loan for a year, instead of using that money to pay off high-interest debt or investing for retirement). You can adjust your withholdings by changing your allowances on your W-4 form with your employer. The more allowances you claim, the less money is withheld. Therefore, if you want to get more money in your paycheck now (and reduce your tax refund next year), increase the number of allowances on your W-4.
• Ask for a raise: The economic law of supply and demand applies to employment just as it does to goods and services. To get an idea of what you’re worth, you can easily get an estimate at Salary.com or Payscale.com.
Here’s to your finances in 2020!
Kent Thune is a Certified Financial Planner® and is the owner of a Hilton Head Island investment advisory firm, Atlantic Capital Investments. He is also a personal financial counselor to Marines and other service members on Parris Island. Thune’s financial guidance has been published at The Motley Fool, Yahoo Finance, Kiplinger.com, MarketWatch.com, Nasdaq.com, InvestorPlace.com, and on his own blog at TheFinancialPhilosopher.com.
