The Only New Year’s Resolution You Need

As I scanned the headlines this month, I couldn’t help but chuckle to myself at the stories that alternately encouraged resolutions around financial planning (“Save $1 Million Dollars!”) and weight loss (“Shed 100 pounds!”).

Everywhere I turned, promises of a “New Year, New You” abounded. But who among us is truly excited about either of these propositions, other than the salesmen that stand to benefit from our overly ambitious commitments?

After all, why should January be different than any other month of the year when it comes to improving our lives? If you’ve ever made a commitment to losing weight or improving your financial picture, you know that it’s a year-round commitment, and it makes no difference what day you start; the important thing is that you begin in earnest.

Most people think that the most important thing is that they have a budget and a plan. But a lack of understanding of their cash flow is actually the biggest thing that trips people up.

In our practice, we have an exercise called the “Cash Flow Conversation” that takes just 15 minutes every year and requires just five things. They are:
• Year-end pay stubs or tax returns
• Details on any change to bank balances or credit card balances
• Details on onetime, nonrecurring expenses that may occur this year (or early in retirement if you’re planning your retirement needs)
• Mortgage statement, if you have one
• For folks headed into retirement, a list of all your income sources that will be available to you, including assets in your 401(k), Social Security account and pension.

These five data points are all you need to gain an understanding of your cash flow.
If you’re heading into retirement, you’ll want to make sure you deduct expenses that will go away after you quit work, such as recurring 401(k) contributions, Social Security taxes, disability insurance payments, etc. Calculate how much you paid in taxes on the income you earned to pay those expenses. Deduct the principal and interest on your mortgage, since that payment typically is money you’re using to support an asset that should be (hopefully) growing at a rate faster than your cost to carry it.

The result is what money leaves your plan every year, or your lifestyle number. For those approaching retirement, measure that number against your income sources in retirement. That gap is now your savings goal. If retirement is not around the corner (surviving is), you now have a realistic number to build a budget from.

Having a simple understanding of the cash flow you have to work with can prevent hours of financial stress and anguish. Taking steps now to head that off might possibly be the greatest financial resolution you can make — in January or any other time of year.

Author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” John Girouard is a registered principal of Cambridge Investment Research and an investment advisor representative of Capital Investment Advisors in Georgetown.