Given the wild year of market ups and downs paired with inflation we haven’t seen in decades, it’s no wonder many federal employees are eager to improve their finances in the new year.
While everyone’s financial situation is different, there are several critical areas that every federal employee should review to improve their finances in the new year.
So, without further ado, let’s review the 8 areas you must review to ensure your finances support the year you want.
1. Have A Clear Path
Before you can achieve your goals, you must first define them. So, you must put pen to paper! Having well-defined goals helps you stay accountable, gives you awareness of your financial situation, and can keep you motivated as you track your progress.
Your financial goals can fall into three categories: short-term, intermediate, and long-term. Once you define your goals, you’ll want to ensure they are SMART (specific, measurable, achievable, relevant, and time-bound). To learn more about creating SMART goals, read this article.
2. Know Where You Are
After you have your goals defined and prioritized, you will need to know where you stand financially. This is where a Net Worth Statement shines; it shows you what you own and what you owe, with the result being your net worth. Creating a net worth statement not only gives you a clear picture of your current overall financial health but also provides the following:
Starting Point: Your Net Worth statement gives you the starting point required when developing your financial plan. You can’t get to where you want to go without knowing where you are.
Benchmark: Regularly reviewing your statement will allow you to measure your progress toward your goals.
Insight: Your bank account may not show you the entire picture. You could have a growing savings account, but if you just bought an $80,000 car, your net worth and subsequent progress towards your life goals could have been negatively impacted. Hence, your net worth statement can make you aware of problems you otherwise may not have noticed, and you can’t fix issues you haven’t identified.
You can learn more about creating a Net Worth statement here.
3. Know Where Your Money Goes
You probably saw this coming. After you have defined your goals and know where you want to be (point B), and have created a Net Worth statement that shows where you currently are (point A), you’ll need a budget to help you allocate your money appropriately to accomplish your goals.
While this is a noncomplicated task, it’s critical and must not be overlooked. Here are a few apps that can help you track your income and expenses: Mint, Personal Capital, and YNAB.
4. Establish or Replenish Your Emergency Account
Did you drain your emergency account last year? Or maybe you never had one. While this may sound like a simple or dull task, it’s a must-have for financial success, as a large, unexpected expense can substantially set your financial progress back.
You can find tips on building an emergency fund here.
5. Protect Yourself Against Catastrophes
While an emergency fund can protect against uninsured losses and smaller expenses, insurance can protect you against financial ruin. Hence, reviewing your insurance needs to make sure you not only have the appropriate insurance, but also the right coverage is critical to your financial well-being.
This review should include life, property, and disability insurance.
Life Insurance: There are a few ways to measure the amount of life insurance needed, but I prefer the “financial needs” approach. To learn more about selecting the right amount of coverage, read this article.
Disability Insurance: The coverage you need depends on various factors, such as your occupation and financial obligations. The amount of your coverage should be enough to cover all your non-discretionary expenses. You can learn more about disability insurance here.
Property & Casualty Insurance: This often includes your home, auto, and umbrella policies. Read this article for tips on selecting the right amount of home insurance coverage.
6. Review Your Estate Plan
There are many misconceptions about estate planning and its importance, but the truth is that everyone needs estate planning because everyone has an estate.
So, what is estate planning? Estate planning is the process of arranging how your assets will grow, be protected, and be transferred efficiently and effectively. And this planning doesn’t just involve post-death events but also includes planning for how your wishes will be carried out if you become incapacitated.
Review the following areas to ensure your plan reflects your wishes:
Will
Financial Power of Attorney (POA)
Medical Power of Attorney
Healthcare Directive (or Living Will)
Trusts
Beneficiary Designations (on all financial accounts)
For tips on creating your estate plan, read here.
7. Get Rid of Bad Debt
According to a recent survey by creditcards.com, nearly half of Americans carry a credit card balance. Since even a small balance will accrue interest and grow over time, everyone with a balance should have a plan for managing their debt to ensure it doesn’t get out of control.
Once you have your budget in hand and know how much you can allocate to paying off debt, the next step is to select a payment strategy. I prefer the following two strategies:
The Debt Avalanche Strategy: This method prioritizes the credit card with the highest interest rate and saves you the most money. List your debt and apply most of the funds you have allocated to paying off debt to the card with the highest interest rate while paying the minimum payment on the rest of your cards. Once you pay off the first card, you’ll roll over the amount you were paying on that card to the second and continue this process until all of your credit cards have been paid. As you can probably tell, this strategy is named Avalanche because as you pay off each card, the amount of cash available to apply to the next card grows exponentially. I suggest using this method if you have the discipline to stick to your plan, even when there is no immediate win.
The Debt Snowball Strategy: Whereas the Debt Avalanche strategy prioritized cards with the highest interest rate, the Debt Snowball strategy prioritizes cards with the smallest balance. This strategy focuses on increasing your motivation by allowing you a small win as soon as possible. When using this method, you’ll apply most of your funds to the card with the smallest balance while paying the minimum payments on the rest. Like the Avalanche strategy, once you pay off the first card, you will roll over the amount you were paying on the first card to the second card. This strategy might be right for you if you need to see a small win up front to keep going.
8. Have An Investment Plan
When it comes to saving and investing, your strategy should be aligned with your time horizon, risk tolerance, and growth needed to reach your goals. You should review the following areas at least annually to ensure that your investment strategy is still in alignment:
Time Horizon
One of the most important factors to consider when selecting your investments is your time horizon. When do you need the money for your goal?
Risk Tolerance
How comfortable are you with taking risks? Do you lose sleep every time your TSP declines in value? If so, you may have a low tolerance for risk.
Having a low tolerance for risk doesn’t necessarily mean you should only invest in the G fund. But it could mean that you should seek the assistance of a qualified financial planner to help you develop an investing strategy that you are comfortable with and understand.
Required Growth
What TSP balance will you need in retirement? What growth rate will be required to reach this goal? Any investment strategy will consist of tradeoffs between safety and the rate of return.
Read this article to learn more about aligning your investments with your goals.
Final Thoughts
Aligning your finances to support the year and life you want will require some time and effort, yet most federal employees find living their dream life worth the sacrifice and commitment.
So, if you put in the time and effort to review the 8 areas we covered in this article, you’ll likely find yourself in a better financial position, with your money supporting the life you want rather than hindering it.
Lastly, if you need help creating your financial plan, consider consulting a fee-only Certified Financial Planner™ (CFP®). You can learn more about why federal employees should work with a CFP® here.
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2023 Legislative Change Notice
The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.
