I won’t pain you with a “new year, new you” tangent; I’m sure you’ve seen/heard plenty of those over the past few weeks. But I will say this: reviewing your personal savings plan in January can set you on pace for a more intentional and successful year regarding your financial goals.
The Power of Incremental Changes
I often emphasize to my clients the importance of small, incremental changes over time; this isn’t a profound or novel statement, but many people can’t contextualize it until they apply it to their lives.
Think about improving your pace when training for a marathon—shaving off just a few seconds per mile can lead to significant gains by the end of the race. I trained for The Boston Marathon a few years back, and anyone who has trained for one themselves understands that you can’t think about how daunting the end goal is, but you must break it into attainable feats/tasks. Shaving a minute off a 3-mile run may not seem like a huge gain when training to run 26.2 miles, but those small, notable achievements make the difference when working toward a much bigger goal.
Going from the couch to a marathon is asking for disaster, but adding a minute or two to your run in each training session is manageable. Going from 3% to 15% might not be sustainable, so go to 4% or 5%. There’s no point in jeopardizing sustainability in favor of quick, unrealistic returns. The retirement nest egg isn’t built overnight, just as you can’t condition yourself overnight for a marathon, either.
Personal Savings Rate – Understanding Your Environment (Where You’re Starting From)
When planning your savings strategy, you must recognize your financial environment, crystallize where you are, and understand the incremental steps toward the greater goal. Our financial systems offer countless opportunities to spend without much thought (county fairs, anyone?) Assessing where your money is going and how much you’re saving helps you stay focused on your goals; think of this as goal #1 for the new year.
Your Participation in Retirement Planning
Understanding your employer’s retirement plan is one of the first steps to building your savings. Are you hitting the set it and forget it button? Contributing enough to get the full employer match? That’s the go-to option for many people because they don’t want to feel they may be leaving money on the table. But “all set” is not the same as being optimized. It’s time to consider whether maxing out your 401(k) is the best move or if you should allocate some funds to other savings vehicles like a Roth IRA, brokerage account, or even an emergency fund.
Personal Savings Rate and Long-Term Growth
It’s easy to focus on the immediate impact of saving—how it affects your paycheck—but the real magic happens over the long term—for example, the difference between earning 6% versus 8% annually over 20 years. The gap might seem small initially, but the compounding effect can lead to dramatically different outcomes. This is why balancing your current needs with future goals is so critical.
The new year is a great time to reassess and set financial goals. Are you saving for retirement (retirements), a vacation home, or planning for college tuition expenses? Once you’ve defined your priorities, with the help of a family financial planner, you can better allocate your resources.
Quick example: instead of putting all $23,500 into your 401(k), the maximum allotted for each fiscal year, you might contribute $15,000 and invest the remainder in a more accessible account for immediate needs to investment opportunities. Diversifying ensures you’re prepared for both planned and unplanned needs.
Training for Your Financial Marathon
January is a perfect time to revisit your savings rate. How much are you saving, and where are you saving it? Even small steps can make a big difference down the road. If you’re unsure where to start or need help refining your strategy, I’m happy to have that discussion. I’m also happy to provide marathon training tips; my door is always open!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
