If you resolve to save 50% of your income and only eat lettuce and ramen noodles all year, you will almost certainly fail in your financial resolutions. If you want to make changes in the new year, set realistic goals that you can actually accomplish.
You can't lose 100 pounds in a week, and you can't fix your finances quickly either. What you can do -- and this applies to any area of your life -- is make incremental improvements. These are three small steps that put you on a path to better financial health by the end of the year. These won't fix all of your problems, but they will help you get where you need to go if you give them enough time.
1. Know where your money goes
You can't fix something if you don't know what the problem is. Before you can make any changes to how you spend and save money, you need to do a deep dive into your finances. Examine your past three months (maybe longer) of bank and credit card records. Track where your money has gone and identify areas where the spending seems unnecessary.
It's important to know what your fixed costs are. You can't change your rent or mortgage payment as easily as you can spend a little less money eating out. Try to get a handle on what spending is compulsory (rent, utilities, student loan payments, car payment, etc.) and what is discretionary.
2. Cut the low-hanging fruit
Looking at your finances may show you that you spend money on things that do not bring you joy. If, for example, the highlight of your week is going out Friday after work with co-workers for a few drinks, then don't cut that expense. If, however, you would be just as happy skipping that event or hanging out while having water instead of a pricey cocktail, consider making that change.
Most people have some money they spend that can be easily avoided. Try to identify where you're doing that and cut back your budget accordingly.
3. Automate saving
When it comes to saving money, the less you have to do -- the better. If you work for an employer that offers a payroll deduction for a 401(k), make sure you participate in the program. And, if there's an employer match, make sure you contribute enough to get as much free money as you can.
If your employer does not offer a retirement savings plan, you can still automate savings with each paycheck. Some banks will let you automate a transfer into a savings account, and most online brokerages let you set up recurring deposits.
Make it so the money never appears in your checking account. You want to have this be something that takes no effort and comes with no temptation to spend the money rather than putting it way.
Do something -- even small steps help
Big plans rarely succeed. You probably won't go from cashier to CEO in a single year, and you most likely won't be able to make gigantic changes to your personal finances. Focus on taking small steps. If you make little changes and stick with them, eventually the results will be significant.
Treat the new year as an opportunity. You don't have to achieve all your goals at once. Every journey, however, has a first step, and you can take that -- then keep moving forward all year long.
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