Bite-Size Strategy Can Help You Achieve Financial Security
Creating new, positive habits requires consistency and repetition. James Clear, author of Atomic Habits, provides many strategies for making new habits “stick.” One of them is what he calls an implementation intention.
Illustration by Cathryn Cunningham / Albuquerque Journal
This involves setting a clear plan (ahead of time) for implementing a new habit. Here is an example: Next week I will exercise on Monday, Wednesday, and Friday by walking 45 minutes at 8:00 am.
Consistency is also valuable for managing your finances wisely. Many people neglect their finances because the necessary tasks feel overwhelming. In this article, I break the tasks down into bite-size pieces. I recommend you set aside two hours on the 15th of each month (during May, June, July, and August) to tackle some important financial tasks. If you do this, you will feel more in control of your finances by the end of the summer. Even though we cannot control many things — such as the stock market, the Federal Reserve, or the national debt — we have significant control over our finances.
The concept of an implementation intention can be used to commit to devoting just two hours a month to work on your finances. It is as simple as stating: “On May 15, June 15, July 15, and August 15, I will devote two hours to managing and improving my finances.”
Do not feel like you must complete every task below. I designed the list so you can choose the tasks that appeal to you, and ignore the rest. We’re aiming for progress, not perfection. Schedule two hours on your calendar now for the 15th of May, June, July, and August. Sign up below if you would like for me to email you monthly reminders.
May 15
Analyze your 2022 taxes, and calculate your average federal tax rate. If you used form 1040 for your 2022 taxes, take the figure on line 24 (total tax), and divide it by the figure on line 11 (adjusted gross income). This represents the percentage of tax you paid on your total income (before deductions).
Your average federal tax rate will be much lower than your marginal tax bracket. Someone can be in a 35 percent marginal tax bracket, and have an average federal tax rate of only 16 percent. (Marginal tax brackets currently range from 10 to 37 percent, but only a small percentage of your total income is taxed at the marginal rate).
Knowing your average federal tax rate is helpful for tax planning, such as deciding if you want to convert a portion of a traditional IRA to a Roth IRA in 2023 or a future year.
Determine how much you are contributing to your 401(k) or 403(b) through your employer. Increase the percentage if you are not at the maximum allowed. Consider switching your contributions to the Roth portion of the 401(k) or 403(b) rather than the traditional portion (most employer plans now offer both). Contributing to the Roth portion will not give you a tax deduction in the year of the contribution, but you will benefit from the withdrawals being tax-free when you retire, rather than being fully taxable as income.
Check your withholding amounts for federal and state taxes through your paycheck. Based on your 2022 taxes, and whether you expect your income to increase or decrease in 2023, determine whether you should increase or decrease your withholding. Make the adjustments now for the remainder of the year.
June 15
Prepare a net worth statement. Simply make a list of all your assets, including investment accounts, bank accounts, employer retirement accounts, the estimated value of your home, etc. Make a list of your debts (also called liabilities): home mortgage, car loan, student loan, etc. Subtract the debts from the assets, and the result is your net worth. I recommend you update your net worth once each year, so plan to do this again on June 15, 2024.
Pay yourself first. If you can afford it — and you already have an emergency fund that will cover six months of living expenses — start contributing monthly to a Roth IRA. Set it up to be automatic each month, with money flowing from your bank to your brokerage firm. The income limitations for 2023 are $153,000 for single filers and $228,000 for married filing jointly. Persons under 50 can contribute up to $6,500. Persons 50 and over can contribute $7,500.
July 15
Determine your asset allocation in your investment accounts and employer retirement accounts. This may be provided on a monthly or quarterly statement from your brokerage firm. If it is not, calculate the percentage of equities (the portion in the stock market) and the percentage of fixed income (typically bonds and bond funds). Read articles online about asset allocation, and decide how comfortable you are with risk. The asset allocation you choose is a personal decision, but an important one. If your investments are heavier in equities than you wish, make the necessary changes to reduce the risk.
Review the specific investments in each of your accounts as well as your retirement plan at work. Research other choices. Decide if you want to make changes, and follow through. A common mistake made by investors is in not reviewing their choices and rarely making changes.
Research the fees you are paying in your investment accounts. If you are working with a financial adviser or stock broker, ask that they list all of the fees in writing.
August 15
Plan a dinner with your partner, and discuss your finances. Review your net worth statement (which you created in June), and each of your investment accounts. Is your asset allocation appropriate? What are your goals for the future? Talk about upcoming expenses. Do you want to do a Roth conversion before year-end? What charities do you want to support? Discussing finances and goals is healthy for a relationship.
If you complete some of the financial tasks listed above, you will be making great progress in creating a new habit to manage your finances wisely. I encourage you to plan a nice reward. Perhaps it will involve traveling, a nice dinner, or something you have been wanting to buy for your home. You put in the work, so celebrate your accomplishments!