10 financial resolutions you can actually keep
By Barry Ritholtz

Washington Post, December 29, 2013



It’s that time of year, when many people resolve to be better: Gotta lose 20 pounds, stop smoking, start exercising. Human nature is such that come January, there will be a 20-minute wait for the elliptical machines in the gym . . . and by mid-February, that wait will drop to zero minutes.

Resolutions are usually a terrible way to effect change. Changing habits involves changing your lifestyle, and that requires a deep commitment that most of us lack.

If you’ve resolved to get your financial life in order, I offer 10 important and easy-to-do steps. None is groundbreaking, but they are all too easily overlooked. If you do all 10, I guarantee that you will be better organized and more aware of your finances. That will lead to better decision-making and lower levels of economic stress.

1. Have a goal-based plan. Investing is a tool to achieve specific goals. Most people invest to save for retirement, college or a major purchase. However, like all the lights and bells in a casino, there is great temptation to get caught up in Wall Street’s whirlwind. With the media buzz, trading action and diversions related to investing, it is easy to get distracted.

Break that habit. Figure out your needs, and pursue that objective. That means asking questions about your future and mapping out a plan in response. (When are the kids going to college, and what’s that going to cost? When do you want to stop working? How much do you want to spend in retirement? How much traveling do you want to do?)

These sorts of questions are what matters to your portfolio — not how you did vs. Standard & Poor’s 500-stock index last month. You are not a perpetual endowment or foundation — you have very different goals. Recognize and act on that.

2. Invest with a basic asset-allocation model. Don’t try to outguess or beat the market. The odds are greatly against your doing so.

Instead, capture what the market gives you: multiple streams of beta. This means owning a variety of asset classes — preferably in their cheapest configuration, ETFs or lowest-cost funds.

A basic model might look something like this: 10 or so holdings, in various weightings of U.S. equities (total stock market, value, growth, large cap, small cap), non-U.S. equities (mature, emerging markets), fixed income (Treasurys, munis, high-yield bond, corporates), then an REIT and a commodity holding. A typical middle-of-the-road portfolio is 70/30 stocks vs. bonds. Rebalance annually. Repeat until retirement.

Multiple streams of beta means you may never know which asset class is going to do especially well in any given year, but you participate in all of them and win over time. Low cost, low turnover, low probability of error.

3. Stop trading. The evidence is overwhelming: You are not a good trader. You individually, as well as the rest of your emotional, irrational species. You lack the temperament, the discipline, the ability to set aside ego and make cold, calculating decisions. No wonder algorithms are replacing people on so many trading desks.

For those of you who just cannot quit, try this: Put 5 percent of your investable assets in a trading account. Track how well your trading does vs. what I described above. If after five years you have outperformed your real investments net of fees, taxes and all other expenses, you can pull an additional 15 to 20 percent into this account.

Experience teaches that most of you will close this account long before five years elapse.

4. Max out tax-deferred accounts. The math on this is incontrovertible: Income you invest before taxes starts out with about a 40 percent advantage vs. post-investment cash. It’s that simple.

If your job offers a 401(k) (or a 403(b) for nonprofits), max it out. And if your firm does not, ask why? Get it to take advantage of this huge tax savings.

You should also max out your IRA — $5,500 per year for those under 50, and $6,500 for those over 50.

5. Refinance your debt. The Fed has announced the beginning of the end of quantitative easement, and the end of ZIRP (zero interest rate policy) is coming. In plain English, this means rates should “normalize” sooner rather than later. That means higher — and, in some cases, appreciably higher — credit costs.

Start with your home. Lock in a low rate, refinancing in a fixed (not variable) mortgage. If you can afford to make the higher payments, go for the 15-year note vs. the standard 30-year note, and your rates will be even lower.

You should also carry as little credit card debt as possible; you might negotiate a lower rate with your bank just by asking. Usually the threat of transferring the balance to a zero-rate “teaser” card gets the job done.

6. Review your insurance. Whatever you carry, you probably bought it years ago, and it could be outdated. Review what you have: homeowners, life, even auto may be insufficient relative to your present financial situation.

If your house has appreciated, you may need to update your homeowner’s insurance. Look into adding a separate rider for valuables such as jewelry or art. Is your auto insurance sufficient to protect all your assets in the event of a tragic accident? Last, consider a general liability umbrella policy to ensure that your assets are protected in case of a litigation.

7. Save for college. Set up a 529 plan. College, like raising the kids you plan on sending, is not cheap: Open up an account, fund it — and get a deduction off state taxes, which is never a bad thing. And pay for college expenses with tax-free funds.

8. Plan your estate. It’s a subject that makes people uncomfortable, but here is an incontrovertible fact: One day, you will die. Sorry to break the news to you.

What is within your control is the financial picture you leave behind. It could be a simple process that provides comfort to family, or it could be a giant mess.

At the very least, ensure you have a will that details how your assets will be divided. If you have young children, appoint a guardian for their care. If you are among the 5 percent of the country subject to an estate tax, buy “2nd to die” insurance so you don’t leave your heirs with a tax bill.

Also, make a living will and appoint a health-care proxy — someone who will make medical decisions for you if you become incapacitated. Many people have important end-of-life preferences, and if you want them followed, write it up. Your estate lawyer can easily do this in addition to your will.

Lastly, get a safety-deposit box. In addition to whatever valuables you keep there, include the latest dated copy of your will and a list of your accounts, online and offline. Include account numbers and passwords.

9. Move your banking online. Set up an auto-pay for your recurring monthly bills. Make other payments online. Make your bank’s online platform generate regular reports that you can share with your accountant. This will greatly simplify your life.

10. Consolidate. Finally, take all the accounts you have accumulated over the years and consolidate them. You don’t need 401(k) or IRA accounts at five institutions running five strategies. Roll the 401(k) accounts into an IRA, then combine them into one account. You will end up with a clearer financial picture.

That’s my list. Taking care of these will allow you to enjoy a happier, more prosperous and stress-free new year.

Ritholtz is chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Twitter: @Ritholtz.

Category: Apprenticed Investor, Asset Allocation, Investing, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “Financial Resolutions You Can Actually Keep”

  1. Al_Czervik says:

    A good list of resolutions, but I have to disagree with the recommendation on second-to-die insurance. My sister and I are owners of a policy on the joint lives of our parents. It was sold to us about 25 years ago as a relatively straight-forward product. It’s actually somewhat complicated and not at all easy for this financial professional to understand. Many years into the deal, we learned that our coverage is not what we thought we had paid for. By that time, the insurance agent had long-since retired.

    My take-away from this experience is to avoid insurance companies except to insure potentially expensive unforeseeable events (auto, home, liability, health, basic term life). Their products can have a lot of convoluted provisions and *they* are the experts. An unsophisticated customer will be taken every time (that is the business model). Furthermore, the commissions are large on these policies.

    Inheriting a lot of money does not qualify as an expensive outlier event. Just pay the taxes.

    Longevity insurance against the risk of outliving one’s investments is possibly a valid reason to get into bed with an insurance company, but I’m wary at this point.

    • I haven’t the slightest idea what sort of crazy-assed product you bought 25 years ago —

      I don’t know how to make this sentence any clearer:

      If you are among the 5 percent of the country subject to an estate tax, buy “2nd to die” insurance so you don’t leave your heirs with a tax bill.

      To reiterate, don’t buy crazy-ass products, and if you expect to leave an estate over $5M, don’t leave your heirs a tax bill.

      • Al_Czervik says:

        Your sentence was very clear, I just happen to disagree.

        And, no sane person intentionally purchases “crazy-ass” products. They are sold by slick sales people. If they were properly explained, one wouldn’t buy them.

        Perhaps the second-to-die policies have improved in the past 25 years. However, I stand by the principle that insurance should be used primarily to pool risks that one can’t afford to bear individually. If the taxable estate is illiquid, then I might agree that insurance would be appropriate.

  2. newt0311 says:

    Re #4, what about Roth IRAs vs. Traditional IRAs?

    Taxes still need to be paid on tax-deferred accounts after all…

  3. Ezra Abrams says:

    1) isn’t the online and autopay bills a personal thing ? I have maybe 20 bills a month I pay by stamp and check
    2) get a 15 year mortgage…but can’t you get most of the benefits by making an extra principal payment ?
    that way if you loose your job or something, you have the lower 30 year payment, not the more onerous 15 year payment

    3) consolidate
    maybe I’m being paranoid, but what if Bank of America or Fidelity is out of commission for a week ?

    4) the first point is good, but it lacks something – what do I do with my goals, other then decide I need more money then I am ever going to ahve ?
    The point of the goals is , imo, to decide how to balance risk: when do i pull money out of stocks and into college fund CDs or equivalent; when do i put retirement out of stocks into bonds etc

    • 1) Yes
      2) Yes, but I said 30 year, not 15. (Gives you flexibility to pay more if you want)
      3) I was referring to multiple 401k situations. That said, we use entirely different banks for personal and business
      4) Goals allow you to assume less risk than you might have otherwise

  4. Ezra Abrams says:

    re life insurance
    20 year level term (fixed premium for 20 years)
    you may be able to get a better deal with whole life or universal life or some other product, but you need to be a CPA to make sure you are getting a better deal and not a worse deal

  5. [...] of writing my own New Year’s financial resolutions post, I’m going to start with this list of Financial Resolutions You Can Actually Keep from Barry Ritholtz.  It’s a good starting point for most people.  However, I’d like to point [...]