7 Key Financial Steps to Take This New Year, Per Advisors

It’s tempting to postpone managing your finances until “next year” or after achieving that promotion you’re chasing. Sadly, time passes quickly, allowing years to slip by while one dreams of financial independence without taking tangible steps towards it.

With the arrival of 2020, now might be an opportune moment to eliminate excuses and take decisive actions. This isn’t just a new year; we’re stepping into a completely new decade.

So, what actions can yield the most significant results? We consulted several financial experts to identify which strategies could benefit most individuals in 2020 and the years to come, and here are their insights.

1. Boost contributions to retirement accounts that offer tax advantages

Benjamin Brandt, a financial advisor and host of the podcast Retirement Starts Today, emphasizes that the start of the year is an ideal moment to reassess your retirement contributions. Thankfully, the IRS has raised the maximum contribution limit for 401(k) plans in 2020 to $19,500.

“Can you save a little extra for your future self?” he inquires. “Try calculating the impact of increasing your savings rate by just 1%, and make a commitment to that adjustment.”

A small increment in savings might barely affect your monthly budget, but you will never realize the benefits unless you give it a shot. (See also: 5 Money Moves to Make Before You Turn 40)

2. Evaluate recent life changes

Financial planner Luis F. Rosa, host of the On My Way to Wealth podcast, suggests that almost everyone should take a moment to reflect on any significant changes in their lives over the past year or two, such as marriage, divorce, or welcoming a new child.

It’s equally important to update your beneficiary designations on accounts like your 401(k) and life insurance to ensure they reflect your current wishes, he advises. (See also: 5 Money Moves Every Single Parent Should Make)

3. Live within your financial means

Many individuals approach their finances in a counterproductive way—spending on desires first and stashing away what’s leftover. Christopher Clepp, a financial advisor from Strategic Financial Group, argues that to shift this trend, one must “change their mindset.”

Instead of focusing on expenditures first, he suggests “prioritize saving for the lifestyle you envision, and then spend what’s left.”

If you save effectively, tracking every expense won’t be necessary, he says. “If saving 20% monthly is your goal, allocate that first, then use the remaining 80% freely, as long as it stays within that boundary and avoids incurring debt.”

4. Eliminate credit card debt

Credit card debt might not seem harmful for many in the short term; however, this type of debt isn’t beneficial in the grand scheme. Given that credit cards average an APR of over 17%, they are an expensive borrowing option. Moreover, their easy access can lead to overspending and a lifestyle beyond one’s means.

Clepp encourages everyone to focus on paying off credit card debt this year. He highlights that carrying an average of $5,000 in credit card debt at that interest rate could cost you close to $20,000 over time just in interest payments. That’s an astonishing amount that could be better utilized elsewhere.

5. Review your insurance coverage

Clepp also recommends assessing your insurance needs annually, even if you believe they are current. “Unexpected accidents can undo all the meticulous planning,” he warns. It’s vital to annually revisit your home, auto, and umbrella insurance policies.

Seek guidance from someone knowledgeable about the options available. “Opting for cheaper isn’t always the best route, but you may discover similar coverage at a more favorable price,” he adds.

Additionally, review your life insurance needs, especially if you’re married or have dependents. Don’t forget to examine your disability insurance to ensure proper protection.

6. Implement a budgeting strategy

Financial planner Brandon Renfro, Ph.D., advocates for trying a budget for your income, advising everyone to revisit their budget in the new year, even if it’s currently working effectively.

“You might uncover minor expenses you can eliminate,” he notes. “Smaller costs often go unnoticed, precisely due to their size.”

By scrutinizing your budget and spending through the year, you might realize you’re indulging in areas that lack importance, which could easily be reduced for extra savings. You may also notice you’re paying for services you don’t use, like subscriptions, in which case you could cancel them and redirect that money toward savings or paying off debt.

Renfro also emphasizes reviewing your financial progress. “This goes beyond just confirming actions taken; it’s essential to verify if those actions actually brought you closer to your financial objectives.”

For instance, if you aimed to pay an extra $100 monthly toward a car loan or credit card, check how much closer you are to fully paying it off. If you achieved your goal, great—consider maintaining your course. If not, reevaluate and identify steps to get back on track. (See also: 5 Steps to Successful Budgeting)

7. Work on enhancing your credit score

R.J. Weiss, a financial planner with The Ways to Wealth, advises that monitoring credit scores is another crucial yet often overlooked aspect of financial well-being.

This goal usually becomes a priority when preparing for significant purchases, like buying a home. However, it should be an ongoing focus due to the numerous advantages that accompany a strong credit score.

Weiss recommends targeting a reduction in your total credit utilization, which measures how much of your available revolving credit you’re using. For instance, if you have total credit limits of $10,000 but $5,000 in credit card debt, your utilization rate is 50%.

Aiming for a utilization ratio below 30% is advisable. Remember, you can achieve this by lowering your debt or by increasing your overall available credit.