Jill Hitchcock is the senior executive vice president responsible for the U.S. private client group at Fisher Investments, a fee-only investment adviser.
A brighter, post–COVID-vaccine future is becoming more of a reality and, as we turn the calendar to 2021, it’s time to set your goals for the new year.
I make New Year’s resolutions for myself and for our family as a whole—which my two sons do not appreciate.
While I may not be much help with health-and-wellness resolutions, I can absolutely help with money-related ones. Your resolutions are up to you, but here are some tips on how to make better financial New Year’s resolutions.
Review your investments the right way
Many people review their finances and investments at least annually. Smart! But it’s not so smart to fixate and make investment decisions based on short-term investment performance. No year illustrates this better than 2020.
If you’d reviewed your investments following 2020’s record-fast bear market in April (rather than in January) and made changes based on the previous 12 months, you’d likely have made drastically different and potentially dangerous decisions!
Market volatility can strike at any time for any reason—or no reason at all—and it doesn’t tell you what will happen moving forward. That’s why past performance—especially over shorter time periods—shouldn’t drive your investment decisions.
As you review your portfolio and make your New Year’s resolutions, focus on your long-term goals and investment time horizon to make investment decisions. Have your goals or time horizon changed? If not, big changes may not be necessary. But if, for example, your living expenses have increased and you need to rely on your portfolio to cover those costs, you may need to increase your allocation to assets with less short-term volatility than stocks, such as bonds or cash.
Focus on what you can control
Did you make a knee-jerk investment decision that went wrong last year? Or did you fall short of your annual savings goals? (Totally understandable in 2020!) It can be tempting to second-guess your decisions, but your New Year’s resolutions should be forward-looking. That’s where you have the most control.
If you resolve to save more money, start by taking inventory of your income and expenses from last year. Then focus on what you can control. Where can you cut costs? How will your 2021 savings goal connect back to your long-term goals? Last year, I detailed how to create and revisit this kind of plan in a financial date night. It can make a huge difference over the long term.
Pay yourself first
If you have kids, you may assume the most important accounts to fund are their college savings accounts. But you know how airlines instruct you to put on your own oxygen mask before assisting your child? I think similarly of balancing financial priorities.
I believe the biggest priority for most people’s financial New Year’s resolutions should be saving for retirement. If you have a 401(k) or retirement plan account, try to max out your contribution. If you do so successfully, consider contributing to an individual retirement account (IRA), too—just beware of the income limits.
While saving for college is important, kids can take out student loans, get part-time jobs or go to more-affordable community colleges or state schools, if needed. You, on the other hand, may have limited options when it comes to funding your retirement.
As you make your financial New Year’s resolutions, set forward-looking goals and don’t rely on last year’s investment performance to make decisions. Prioritize your own retirement and, in the midst of it all, don’t forget to have some fun in 2021. I think we’ve all earned it.
Read more information and tips in our Planning section