Tax Time Financial Resolutions

Mill Valley mom and Certified Financial Planner™ Katy Song offers some tax time tips to help you achieve your financial goals in 2011.

Between 40–45% of adults make New Year’s resolutions each year, and less than 50% of those resolutions are kept after six months. Even though this statistic sounds pretty bad, studies show that people who explicitly make resolutions are 10 times more likely to reach their goals than people who do not explicitly make resolutions.

For 2010 (like most years), the most popular New Year’s resolutions were: losing weight, quitting smoking and improving finances (save money, reduce debt).  While over indulging in holiday festivities may help motivate people to focus on health in the New Year, there is nothing like “tax time” to motivate us to do something positive about our finances.

Taxes are backward looking. By the time you have all your paperwork together and a good idea of how 2010 turned out, it’s too late to do anything about it. However, it is not too late to make meaningful changes in your financial behaviors for 2011.

First, you need to know your financial position. Doing your taxes is a great starting point. Your tax return will tell you know how much money you made. Subtract how much you spent in 2010, and you have your cash flow for the year. The goal is to have positive cash flow!  You also need to create a family balance sheet that lists your assets and any outstanding debt. Assets less debt equal your net worth. While there is no ideal number for “net worth”, the book The Millionaire Next Door (1998), provides a general formula:  Net worth = Age * Pretax income ÷ 10. For example, if you are 35 and have a gross salary of $100,000 per year, your ideal net worth should be $350,000. This can provide you with a benchmark and help you determine if you need to reduce your debt and/or increase your assets.

Second, set your priorities for 2011 by confirming your family’s values and goals. As mentioned above, you are more likely to attain your goals if you explicitly set them. For example, if you value financial security and want a sufficient emergency fund (short term security) and growing retirement assets (long term security), your priority may be to maximize retirement savings and adjust your spending to build up cash reserves. You may also value travel and desire to take two weeks off for a real vacation without guilt. The key is to write down all of these values and goals as a family, and decide which ones are priorities for 2011 and which ones can wait.

Finally, be accountable to your financial resolutions by setting measurable smaller goals and building in rewards that will keep you motivated. If saving money for a big vacation is your priority for 2011, treat yourself to a guide book or item for your trip at the half-way mark. This will keep you excited and help remind you of the reasons why you are working so hard to achieve your goal.

If you follow these simple steps, you will more likely achieve your goals and can beat those New Year’s resolutions statistics with your Tax Time resolutions.

Katy lives with her husband and two young children in Mill Valley. Visit her online at www.katysong.com, or contact her at katy@katysong.com