Happy New Year. I hope your holiday was a safe and fulfilling one with family and friends and the best of the new year to you. The topic of new year's resolutions, especially as it pertains to personal finance, has always been a bit of a head-scratcher to me. If you need to make an immediate change in your life, why wait until the new year (doubly important if the change is health related)?
Regardless, there is a certain symbolism of the turning of a new year and new seasons bring new opportunities for change. But are resolutions for change bound for failure? What exactly are the chances that your new year's resolution will succeed? Dr. John Norcross, a professor of psychology at the University of Scranton, estimated on NPR that 40-46% of new year resolution makers will be successful at six months.
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While not particularly encouraging, as the professor indicates, that is better than 0% of those who opt not to attempt a positive change in their lives. There are a myriad of reasons why new years resolutions fail. In the context of personal finance, there are several large ones:
Personal finance resolutions are made without creating or updating your budget
It is encouraging to resolve to pay off credit card or student debt or increase your savings rate but is it actually grounded in the reality of your personal budget? It would be prudent as a mini-resolution to create or update your budget to determine where you stand at the end of each month (if you are a newbie to personal finance, setting a budget and following it would be a great foundation to build upon). In this manner, your resolution is grounded in the reality of your particular context and numbers and goals are not being picked arbitrarily.
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Personal finance resolutions attempt to accomplish contradictory goals
Saving more money or paying down debt as individual goals are both laudable. But most people cannot accomplish both; if you devote more of your take-home pay towards debt reducation, it is difficult to increase your savings rate at the same time especially if your salary is fixed every month (while not impossible, few can pull off both at the same time). In other words, make sure your goals are not contradictory or very difficult to accomplish at the same time.
Personal finance resolutions ignore the reality of the market
Statistics consistently show that most mere mortals have a hard time matching, much less beating, the market over medium to long term regardless of their education, occupation or skill set. Over the long term, equities on equity should be in the range of (dividend yield + increase in dividend annually expressed as a percentage- aka the Gordon Equation).
Similarly, if you are interested in being a real estate investor, it would be difficult to achieve a capitalization rate over the range of 6-8% since most REITs have trouble exceeding this rate.
To set as a resolution some goal which ignores the reality of the market is an invitation to set oneself up for failure. In other words, be realistic.
Personal finance resolution ignore your past tendencies
Since a new year's resolution is supposed to correct some undesirable behavior in the past, this seems like a strange factor to cite. However, tackling the problems of the past using the same methods often lead to the same results. It is one thing to try to correct a behavior, it is another to use a different approach to solve the problem.
Personal finance resolutions are dropped at the first sign of trouble
This is pretty self-explanatory but loss or failure should be used constructively rather than as a reason to give up hope. Analyze what happened and make the proper adjustment. Perhaps saving 20% of take-home salary is simply too unrealistic but 10% is realistic, reasonable and attainable.
Personal finance resolutions attempt to reinvent the wheel
If you are paying down your mortgage, building up your retirement savings and funding your child's education, there is nothing wrong with setting as a new year's resolution doing more of the same. Taking what works perfectly well and moving away from it to achieve change for change's sake may not necessarily be a good thing.