5 New Habits For The New Year
Going into a New Year, the majority of the world establishes their very own personal New Year resolutions. Predictable candidates are: more exercise, better eating habits, try a new adventure, pick up a new hobby, or simply be nicer to people. All of those are awesome resolutions to reach. The problem is they are just resolutions. How far into the New Year will those resolutions last?
The idea of pursuing New Year resolutions is to personally improve oneself. However, the focus is typically on something that may either not be important or far from you even truly caring about it. If we are seeking self-improvement, then the focus should be on developing and sustaining quality habits.
In the money spectrum, we should always work to refine our financial health. Whether it is strengthening our credit, building our retirement account, or creating a strong emergency fund, our money habits are crucial to our overall personal health.
When it comes to investing, a great percentage of individuals and couples rarely bring the wealth building component into their New Year resolutions. The typical aim is for something remotely simple to attain, rather than a goal that will benefit us for the long-term, financially. It is clear to say we all should be investing in some capacity and due to the great importance of building wealth; it deserves a place in everyone’s New Year’s resolutions.
Instead of proclaiming our new endeavors as resolutions, let’s simply call them habits. These 5 investing habits are geared to help everyone improve their financial wellbeing and increase the productivity of their investment portfolio.
1. Strengthen Portfolio
At the end of every year we take a glance at the performance of our investment portfolio. This is the time to check how investments performed throughout the year, measure the outcome of any goals, and determine whether any adjustments are needed. Diversification may be an area of necessary opportunity if your portfolio consists of a single asset. The current markets we are in experience a great deal of volatility at any given period.
For beginning investors who have begun their journey with a 401(k), this New Year may be the chance to add another asset to your portfolio. Real estate and stocks always present opportunities for outstanding returns, when acquired at the right price. Rental properties and dividend paying stocks open the door to passive income, while majority of the time see appreciating value.
2. Increase Contributions
Quite possibly the simplest way to improve your investing habits is to gradually increase your investment or retirement account contributions. One method I share in my book How Investing Every Month Can Make You A Millionaire, is the escalation approach. Each year you can increase your monthly contributions by $10 or $25. Before you will realize, the contribution amounts will begin to take off into sizable portfolio difference makers.
Increase your retirement contributions; increase your children’s 529 contributions, and increase your portfolio’s value. It all takes considerable time to reach a desired level, but raising the quantity of cash inflows each year will help to reach your goals. Besides, the goal in your career is to earn more income as you grow professionally, so the opportunity to increase contributions will come.
3. Improve Knowledge Base
There is no subject matter that we can excel at without understanding the basics, and then learning more to increase our knowledge base. Investing terminology always has new-found terms for new events that take place; however, there are boundless terms that serve as the fundamentals for investing. If you do not already understand how stocks, bonds, commodities, mutual funds, index funds, 401(k) plans, IRAs, real estate, dividends, or ETFs work then make it a purpose to learn these investment strategies this year.
I’m not pressuring anyone to add books to their to-do list for the New Year. The suggestion is to do a little bit of research to further educate you. The more we learn, the greater our skills become, and in turn increase our chances to flourish with our investment portfolio. What is the harm in learning a new investment/financial term each week or biweekly? That is 26 – 52 new terms each year, which will only take a few minutes each lesson.
4. Become Tax Defiant
One of the biggest defenders working to shrink your profits and gains is your taxed income. Taxes are inevitable; however, they can be minimized properly for your investments. For example, qualified retirement plans such as, 401(k) plans and Individual Retirement Accounts (IRA), benefit from tax deferred earnings. With a traditional 401(k) and IRA, an account will not be taxed until earnings are withdrawn during retirement. Therefore, an investor can allow their account to grow untouched until they are ready to withdraw.
Another taxable vehicle investors find themselves losing heavily on is capital gains tax. When an investment is sold, the profit is deemed as income and is subject to capital gains tax. The way to reduce this tax is to invest long-term. Any asset held for at least one year before being sold is required to pay a reduced tax rate. If you are buying and selling assets less than a one year span, then you are subject to a capital gains tax, equivalent to your normal income tax rate. Taxes can eat up your returns quicker than you realize, so avoiding frequent short-term capital gains taxes will help keep more of your profits in your hands.
5. Lower Fees
The other defender against your investment earning is commissions and fees. Some taxes are inevitable, but many fees are completely avoidable. When investors choose to either trade short-term securities or participate in a mutual fund, the ongoing fees associated will add up greatly over time. Capital gains is not the only burden with short-term trading, but also the commissions required for reach buy and sell transaction. Mutual funds’ fees range widely across the board from .50% to 2%. Imagine reducing your annual portfolio returns by 2% every year.
The blunt way to avoid the accumulation of fees is to not invest as a high frequency trader or a mutual fund participant. An option to invest passively and steer away from mutual funds is to pick up an Exchange Traded Fund (ETF) or index fund. ETFs trade like stocks do, so they experience daily movements, but also do not require actively managed fees. Therefore, the gains and returns an investor realizes are not subject to management fees. Even for those who may not have the time to actively manage their own portfolio, index funds such as the S&P 500 can realistically return he same appreciation as the majority of professionally managed mutual funds.
Investing is wholeheartedly about accumulation. The more productive and skillful habits we acquire over time, the greater success we can have of accumulating an outstanding investment portfolio. The objective going forward is to become a better investor, meaning enhancing our knowledge base to optimize our potential to build a high net worth. New years always bring the opportunity to improve in areas we are weakening, so why not make our investing skills one of the top candidates for strengthening?