Nothing says “Happy New Year” like a promise to yourself to spend less and save more.
In fact, “improving finances” came in right behind “losing weight” among new year’s resolutions last year, according to John Norcross, a psychology professor at the University of Scranton and author of “Changeology: 5 Steps to Realizing your Goals and Resolutions.”
A lot of resolution makers — typically 44 percent to 46 percent — are successful at the six-month mark, says Norcross. Still, that’s less than half. And although you’re just as likely to succeed at changing your money habits as you are in making other changes, there’s no denying that financial resolutions pose challenges. Savings goals are often abstract and decades away, investment decisions are complex, and memories of losses during the financial crisis are hard to overcome — all of which make it easier to put other things first.
“Because of the tyranny of the present, financial needs for the future seldom climb to the top of the priority list today,” says Greg Davies, behavioral-finance chief at Barclays Wealth and Investment Management.
Increase your odds of success by adopting the practices of successful resolvers: Set realistic, attainable goals, declare them publicly and develop a detailed action plan. Track your progress, and use the buddy system. Expect slip-ups, but don’t beat yourself up over them. Reward your successes (but don’t spend all the money you’ve saved!).
It’s hard to commit to something indefinitely, but most of us can manage incremental change. Instead of “I’ll save more,” you might resolve that in January, say, or through the first quarter of the year, you will increase your saving by x amount. Or make a (short) list of things to accomplish by a set date: “By the end of January, I will have set up a retirement fund,” for example.
I asked Davies for the one financial resolution he would recommend this year. “Deploy your capital,” he said. Too many investors have been saving but not investing since the stock market bottomed in 2009.
Norcross’ advice: “No doubt about it — save now.” Start young, and let the power of compounding work its magic.
Among the resolutions from other behavioral-finance experts: Make savings automatic. Create an enforcement mechanism. Set up a routine to review investments and reallocate as needed. Start using a financial planner.
Pick one of these resolutions, or choose your own. Good luck, and Happy New Year!Anne Kates Smith is a senior editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to firstname.lastname@example.org. And for more on this and similar money topics, visit Kiplinger.com.