The start of a new year is a great time to reflect over the past 12 months and look forward to positive changes in the year ahead. Whether you stick to one or not, most people will have started 2015 with a New Year’s resolution for positive change. According to usa.gov, out of the 13 most popular resolutions in the United States, two center on finance: save money and manage debt. Although most people start with good intentions, inevitably many revert to old patterns. So what can you do to turn your good intentions for 2015 into a lifelong habit?
A rule of thumb is to allocate 20% of your income towards your financial future (this includes cash savings, retirement plan contributions, and paying down debt). I use “planning” rather than “retirement” because, if you’re doing it correctly, eventually the money you put toward debt and use to build up savings can be reallocated towards the end goal of retirement. That said, going from nothing to 20% is unrealistic to maintain. However if you can start small by allocating an extra percent or two toward retirement annually, then each year as your business continues to increase, so does your percent and balance towards future financial needs.
For many solo or small firm attorneys, getting organized for filing taxes becomes the top financial focus for the first quarter of the year. While you’re digging up business receipts and updating your mileage tracker, don’t let another year pass by without focusing on personal financial goals, like saving for retirement. You have until you file your taxes to contribute to a SEP or Roth IRA and still have them count as 2014 contributions for tax purposes. Talk to your certified public accountant to determine your contribution limits and whether you’re within the Roth income phase-out limits. Starting now gives you the advantage of the time value of money and helps your money to work as hard as you do.*
Many people try to save on a monthly basis, yet have no idea what amount of savings would get them on track for their goals. By blindly saving, how can you be as efficient as possible with those surplus dollars? To increase the likelihood of reaching your goals, consider developing a comprehensive strategy that addresses every aspect of your financial situation. Get organized, complete a budget exercise, and identify your goals. Work with a trusted advisor to break your goals into phases and then develop a flexible and realistic action plan to complete each phase. Following these steps can make it easier for you to see progress and help you maintain the discipline needed to stay on track.
*Allocating 20% toward future financial needs does not guarantee adequate retirement income. Each individual’s situation and goals are different and require case by case analysis.
Compliments of the American Bar Endowment and Kristin R. Brandli, Independent Financial Consultant. This should not be considered as tax or legal advice. Specific tax consequences should be verified by your tax or legal advisor.
About the ABE
American Bar Endowment (ABE) is a 501(c)3 not-for-profit ABA affiliate that sponsors insurance plans for ABA members. Each plan contains a unique charitable giving component. The ABE sponsors Kristin Brandli for participation at various ABA Section meetings and to write articles for ABA Section publications.