Most of us can agree on one main goal for 2020: make life simpler and easier.
But with that said, is it really necessary to work stressfully hard at simplicity? Or is there an easy way to get there?
After all, behavioral economists have proved it: The best financial decisions are those that are pre-considered and then automated. If your bills get deducted on autopay, you are never late with a bill. Your credit score goes up. You never pay late fees. If your strong 401(k) contribution is automatically deducted from your paycheck for 30 years, you end up a millionaire at retirement. The funny thing is—when you are saving for your future on a steady basis–you almost never miss the money. One day, the major reward outweighs the minor sacrifice.
So don’t just make a resolution in 2020, start digging for every expense that can be automated. Once you get into the task, one thing will lead to the next and you will find yourself enjoying it. The great Zig Ziglar once said: “You don’t have to be great to start, but you have to start to be great.” How true.
Money management boils down to a hierarchy of needs. In retirement, having sufficient income tops your “must-have” list. But what about unexpected surprises and emergencies?
For your plan to successful, one of the first things to do is build an emergency fund. It doesn’t need to be an astronomical amount, but it should be substantial enough to handle most emergencies and surprises. It may feel like wasted money when you are setting it aside, but its not. There is a reason for an emergency fund: it’s called Life. One day you have a job, the next you don’t. That’s not only a surprise, it’s an emergency.
In that case, three to six months of your salary would really come in handy. That’s really what you should have on hand at all times in a safe liquid account dedicated to nothing else. We all should expect to be surprised by life, and FIGURE on a few things going wrong. Having the money to meet the surprise head-on keeps it from becoming an emergency.
When American Express surveyed people about what specific expenses pressured their budgets, generally they were not talking about catastrophes that could never be expected. Instead, they were talking about predictable expenses. About 46 percent said car expenses stretched their budget. Should that really be a problem? After all, you KNOW you will have car expenses, especially if you pay off your car and keep it beyond five years. Things wear out. You can plan for problems by setting money aside or buying a warranty. No sweat.
The other category for a big unexpected expense was health care. About 44 percent in the study experienced this. A big deductible after a surgery is definitely a budget buster. It can be both an emergency and a surprise. What causes the emergency is having the wrong health insurance in the wrong amounts. Your emergency fund may never be as large as the experts suggest, but the key is having a healthy amount to protect yourself against emergency.
Here’s how to do it: Put aside a regular amount for your emergency fund in a separate savings account. Let it build up. Put aside a regular amount for upcoming expenses. Let it build up. That car repair is going to happen—it’s not a surprise, its just life. Set aside some dough for it.
The best advice: Build a complete picture of your annual expenses so nothing comes as a surprise. Use an online calendar to note when insurance payments are due. Figure out what these payments would cost you if you had to make a payment every month. This is how much you have to save. Rid your monthly expenses of unnecessary subscriptions, gifts, and impulse buys (i.e. spend less time on Amazon.)
Build your emergency funds with that money—you will never miss it.
Face it: Being alive costs money. One day you will have an expense that is a truly critical, urgent need. And as my mom used to say, Santa Claus will not cover it. It may be a LIFE surprise, but it shouldn’t be a MONEY emergency. Plan to always have your special fund ready– rather than a credit card to ruin or weigh down your financial life.
Also, make sure your financial plan suits you. A good financial plan creates the feeling of freedom. The IQ Wealth Smarter Bucketing strategy is such a plan: You always have the money you need for emergencies, travel, and bill paying. Your retirement income exceeds your expenses, and your dividends keep rolling in like clockwork from blue chip companies. You may also include a low cost high income retirement annuity to keep your income stable and secure for life. This is a plan that is easy to start.
So, don’t worry about having a resolution right now–decide simply to cut the worry in 2020. How? By hitting the “EASY BUTTON” and getting your financial plan running like a clock.
Steve Jurich is financial planner and retirement strategist in Scottsdale, Arizona.