A few financial resolutions to start off the new year
Getting
Started
Saving more, spending less, paying for college. These might be some of the financial resolutions you make for the new year.
How you meet these goals will depend on what lies ahead for 2016. What will you be studying in college? If you’re working full time, is your job secure? And does your employer make matching contributions to your 401(k)?
Author and longtime personal finance writer Jonathan Clements (his latest book, Money Guide, has been updated for 2016) recently explained in a phone interview why these questions matter. What follows is an edited version of the conversation.
Q: If your financial resolution is to build an emergency fund in 2016, how much should you save?
The No. 1 reason for an emergency fund is if you lose your job. So how much money you need depends on how secure your job is. If you work as a teacher or government employee, saving three months’ worth of expenses is probably fine. If you work on commission, your job is probably less secure and so you might want to go for six months of expenses.
Building up an emergency fund is one of the least exciting things to do financially, but it should be a high priority during the first few years that you’re out of school. Once you have it, you’re set for the rest of your working career.
Q: What if you want to buy a home?
Think about how long you plan to stay in a home because the cost of buying and selling property is exorbitant. Round trip, you will pay roughly 10 percent of the home’s value once you figure in closing costs, legal fees, moving fees and, most importantly, the brokerage commission you’ll pay when you sell the house. So if you’re in a home for less than five years, there is a good chance you won’t make any money, even if property prices appreciate at a moderate rate.
Q: What’s a good way to squeeze out more savings from your paycheck?
Keep your fixed living costs — including housing, car payments, insurance premiums, groceries and utilities — to 50 percent or less of your pretax income.
Q: What if your goal is college this year? How should you decide what school you can afford?
You need to think really hard about how much student loan debt you’re going to take on given the earnings you’re likely to have over your lifetime. It makes sense to take on debt when you’re young because you have decades of paychecks ahead of you to pay back those loans, and college itself is a great investment. But you should not be taking on $80,000 in debt if your prospective lifetime earnings are low. To figure that out, use the new CollegeScorecard.ed.gov, which shows a school’s costs, graduation rates and salaries of grads.
Q: Should saving for retirement be a resolution for 2016?
If you’re a freshly minted college graduate, it’s really hard to look ahead four decades and think about retirement. Retirement should be a priority from the day you enter the workforce. At that point, you may not be able to afford to put away the recommended 10 percent or 15 percent of your income toward retirement. But if you work for an employer that offers matching contribution to the 401(k) or 403(b) plan, put in at least enough to get the full match.