Financial Resolutions For The New Year

Do you make resolutions at the end of the year? Most of us make them but don’t follow through to fruition. However, financial resolutions are different because it’s a way to do some financial planning in the new year and to adjust to some changes that may coming that will impact us.

For many, 2024 has been challenging, especially with higher inflation for groceries, rent, and other items. Though inflation came down from the recent peak of over 9.2%, the Fed has expressed concerns that signal fewer rate cuts, with only two in 2025, down from four rates previously. They feel their job is to reduce inflation to the 2% target incomplete. I agree, and it is unclear what the effect is if the US increases tariffs on our trade partners and how it impacts inflation.

Be Optimistic For The Future

Still, our economy is fairly stable, with low unemployment and anticipated growth, so there is no reason for chicken little sentiment now. It’s an appropriate time for old-fashioned optimism in 2025.

We want to share financial lessons with you as you plan for 2025. You may do this out of habit or need, or you may be in already good financial shape. Hopefully, you did well during the unusually strong financially markets in stocks and cryptocurrencies, and no one is necessarily a crash. However, the markets may be more tame in the coming year, and may require some rebalancing or  broadening of your stock picks. It’s always a good idea to review, talk to your financial advisor, and make some changes, if needed.

Financial  Resolutions For 2025

 

1. Review Your Financial Goals

If you realized your financial goals in 2024, you should feel wonderful about the accomplishment. Maybe you traveled, earned a promotion, sent your kids to college, or bought or sold your home, but what’s the plan for 2025? Revisit your goals for the coming year. Set reasonable financial goals for 2025 and beyond. 

We can learn from our experiences that may have highlighted some of our past mistakes, such as not saving enough for unexpected emergencies. There isn’t a crystal ball to prepare for such events, but you should realize that things can happen to us.

2. Build An Emergency Fund

Having savings on hand for emergencies should be a top financial goal. Establish an ample emergency fund to cover your necessary and urgent living expenses for up to a year. In regular times, 3-6 months may seem plentiful, but in reality, saving for an extended period may have proved necessary in the past. This money is a cushion for you to feel more financially secure should you lose a job, have a medical emergency for you or your pets, or a flood in your basement.

Invest these funds in liquid investments with easy access. With the low-interest-rate environment, you won’t be earning much income from current yields, but liquidity–the ability to quickly have cash without much loss of value– matters. Think of this as savings, so you don’t have to borrow on your credit card that will make it hard to pay off high-cost debt.

Your emergency fund should be a big enough cushion to pay your monthly bills and costs such as food, rent or mortgage, utility, health care, car, property taxes, and pet care. Ample savings will allow you to sleep better at night.

3. Have A Budget To Stay On Plan

To be financially disciplined, you need to understand your monthly budget. Our combined income sources, less total expenses (fixed and variable expenses) equals our bottom line. Many people had significant challenges if they lost a job, had emergency medical costs, or both. When your income, fortunately, exceeds your expenses, you have money to save. This money can be added to your emergency fund, pay down debt, or invest in the future.

On the other hand, if your costs exceed your income, you will need to earn more income, borrow to pay expenses, reduce spending, or a combination of these. Bring down whatever costs you can. Borrowing on your credit cards will put you in a terrible financial bind. The interest costs of credit card debt have been higher in 2024 averaging in the high teens, and are destructive.

Plan to review your spending budget monthly.  Some people use spreadsheets; others use apps. Whatever way works for you to plug in your monthly pretax income less fixed costs, mostly your living costs such as rent, utilities, monthly car payments, insurance, typical food/grocery,  and other debt. 

Your variable costs are often discretionary and include dining out, entertainment, travel, and potential costs. Another way to budget is to track your monthly expenses by reviewing your bills regularly. You may be motivated to save once you see how much you spend on things you didn’t need.

4. Spend Less Than You Earn

Manage your spending. Invest your leftover savings. During the pandemic, we had fewer opportunities to spend as we hunkered down in our homes. We didn’t go on vacation, dine out much, and commuted less. Some people are spending more than they should, and should take it down a notch, especially if you are carrying debt. We spent more on groceries, subscriptions, and gaming platforms this past year. 

 On the other hand, the amount of personal saving is below the rate of 2019, pre-pandemic. Increase your liquidity, so you can have more on hand, and invest more.

There are reasons why we justify spending more than we should. We often prefer instant gratification, living today but not focusing on our future. To be in good financial health, we should be doing both. Our emotional biases impact our purchases, and marketers leverage those tendencies. Our lifestyles and personalities play a significant role in overspending, especially when we want to impress people with our success.

5. How To Spend Less and Save More

When overspending habitually, we need to motivate ourselves to change our ways. When we diet, we often take a break and eat something we know we shouldn’t. If we correct that error, usually no sustainable damage has been done. There are a lot of comparisons between saving and dieting. Sometimes falling off a diet means we have given up. The best thing is to dust yourself and get back on to your diet.

If you realize your overspending is harming your finances, you may need some motivation to reduce spending. When your overspending and debt accumulation is severe, you may want to consider therapy or meeting with a financial counselor to help you.

Motivate Yourself To Spend Less:

• Focus on your financial future.
• Understand your household budget.
• Track and review your spending on items you may not need.
• Be more conscious of how you shop and biases that interfere with your decisions.
• Negotiate any agreements you have if you are facing challenges.
• Cancel subscriptions you no longer need.
• Invest, pay off debt, or add to the emergency cushion with extra savings.

 

6.  Be Disciplined When Using Credit Cards

Having too much debt will make it difficult for you to achieve financial security and wealth. Make trade-offs that minimize debt accumulation. When credit card issuers charge 15% or higher on your balances, resolve yourself to spending less.

Pay your bills on time each month and aim to pay them in full.  It may mean making trade-offs between buying something you don’t need and may not even want very much. Carrying significant credit card balances is a substantial financial anchor and is a habit hard to break.

Instead, try to reduce your credit card balances to zero, so you never have to pay the issuer any interest owed. I consider credit card debt to be among the most toxic. Use more cash, which often limits your spending, or just buy less until you have more control over this debt.

7. Manage Your Debt Wisely

Like paying taxes, there is a certainty you will accumulate debt in your lifetime: mortgage, cars, student loans, smartphones, and credit cards. But you need to be prudent when you borrow money so that it doesn’t interfere with your wealth accumulation. Where possible, pay down debt, particularly your credit card balances, which can be financial weapons of destruction. As interest rates come down in 2025, you may be able to refinance your loans.

The trade-off for extra savings should go to your emergency funds, high-cost debt, and investing your money.

Find Savings To Pay Down Debt From: 

• Annual tax refunds.
• Passive Income.
• Your annual bonus or a raise.
• Extra savings can help.

Some debt accumulation is associated with borrowing that is more like investing. Borrowing is not always a bad thing especially for good reasons like your college education, furthering your career, or buying your home. As we mentioned earlier, credit cards are incredibly toxic.

 Refinance Your Mortgage

Current mortgage rates are at 6.9% well above the 2020 lows below 3%. For those who bought homes in 2024, it’s too early to refinance your mortgage loan, and you may need to wait until late 2025 or 2026.  

Several factors influence mortgage rates: the Fed’s actions, 10 year Treasury yields interest rates, economic indicators, and inflation. While you can’t control external factors, having a higher credit score and a lower loan-to-home-value will contribute to more attractive mortgage rates.

8. Review And Fix Your Credit Report

As part of this new year’s resolutions, make sure to review your credit reports periodically. You can do so for free through AnnualCreditReport.com. You can rotate among the 3 credit bureaus to examine your report every few months.

Lenders rely on our creditworthiness to see our borrowing rates. The higher the score on a 300-850 score, the lower the annual percentage rate (APR) we are charged on car, mortgage, or private student loans. Check for errors you can fix quickly on your report and follow-up with vendors when you spot those issues. These errors can hurt your credit.

9. Raise Your Credit Score

There are few parties–landlords, employers–  that have stakes in our credit scores besides lenders. Improving your credit score can meaningfully help you reduce the total size of your debt (mortgage, car, and other loans) and provide financial security. Have a better understanding of how your credit scores are determined and how to raise them.

A Better Score Means Lower Interest Payments

A good credit score ranges between 700 and 750.  The difference in the APR based on credit scores are meaningful. The borrower with a 650 score would pay a 5.40 % APR  on a $250,000 30 year fixed mortgage loan. This score would require a monthly payment of $1,404 or $255,440 in total interest paid over the loan’s lifetime. A borrower with a better credit score of 700 would have a lower APR of 4.58% or $1,279 for the same property and pay far lower in lifetime interest payments of $210,440. 

10. Save For Retirement – Max Out Your 2025 Contribution Limits

What happens to your 401K employer-sponsored plan and Roth and traditional IRAs in 2025? You should contribute the maximum allowed in 2025 for your retirement plans, especially if your employer has a company match program which is a valuable benefit.   

For your 401K employer plan, the contribution limit for employees is $23,500, with a combined limit of $70,000 for employees and employer. The catch-up contribution for employees who are 50 or older is an additional $7,500, and those who are 60 to 63, may contribute another $11,250.

For example, your company offers a 50% match of your contributions up to 6% of your salary. Suppose you contribute 6% of your $55,000 annual salary, or  $3,300. Your employer will match 50% for their contribution of $1,650. The employer’s contribution is like getting free money.

As soon as you start working at a new job, you should enroll in your firm’s 401 employer-sponsored plan. Automate a specific amount or percentage of the money you receive from your paycheck to be deposited into your retirement, investment, or any savings account.  It’s an easy way to save consistently for your retirement to build this account through compounding.

Save as early as you can to leverage compounding benefits and for maximum contributions.

11. Essential Investing Lessons 

This has been an unusual year for investors, especially for “MAG 7” stocks and other companies that involved in AI technology and can contribute in building out data centers or provide essential electricity needed for the anticipated AI growth cycle which will continue into 2025. 

 

A Few Lessons For 2025

• Stay invested, don’t bale when the market becomes volatile. 
• Use extra savings to invest in a down market opportunistically.
• There may be new winners in 2025, that differ from 2024, such as healthcare, retail, and other industries that were less robust in 2024. Some believe there bonds may be more attractive. 
• There may be more IPOs in 2025, with new companies to review.

We advocate Buy/Hold strategies, rather than short-term trading. We recognize the excitement of day trading and swing trading long term (which are different schemes) discussed here. On the other hand, ‘boring” long investment strategies take advantage of compounding your returns, lower capital gain tax rates if you hold stocks more than a year, and allow you to ride out market volatility.

12.  Review Your Designated Beneficiaries and Estate Plan

Chances are, if you are working, you have some assets. You likely received forms to complete at work, the bank, or online to designate beneficiaries. Beneficiary designations identify who your intended heirs are for most of your assets. These assets represent the non-probate property.  These assets can be efficiently and effectively transferred outside of your last will, overriding your estate planning documents. Don’t neglect reviewing your estate plan either.

The mistake many people make when designating their loved ones is that their designations may out-of-date or unreasonable. You thought it was cute that your boyfriend selected you (or so he said), so you reciprocated by naming him.

If you don’t review your appointed beneficiaries periodically and at the same firm, you may still have your parents, siblings, and ex-spouse indicated as recipients. Review these forms regularly. You should review your documents after significant life events such as loved ones’ passing, marriage, divorce, and births. Updating your records can usually be done online. We explain more about designated beneficiaries here.

14. Charitable Giving

It is essential to consider charitable giving. The pandemic and protests highlighted the divide between the wealthy or those less fortunate. Those who are more lucky should give more each year.

Whatever the cause, charitable giving is a necessity. Others depend on us. As Winston Churchill said, “We make a living by what we get, but we make a life by what we give.”  

15. Be Grateful

Having a grateful attitude is always healthy. Let’s take time to be grateful for our loved ones, friends, colleagues, and those who would appreciate our recognition.  We made it to another year, and lets be grateful. 

 

Final Thoughts

Enjoy the turn to the New Year, and all that may come to you and your family. We live in a great country, flawed as it is, but with more freedom than others may have around the world. Live your life as best you can and make needed changes and adapt where modification is challenging.