New Year Financial Resolutions: 5 Steps for Your Financial Plan
In the new year, a lot of people’s resolutions may be regarding improving their finances. Knowing what to prioritize is critical for achieving your goals as quickly as possible, and now is the perfect time to create or revisit your financial plan.
Here’s a guide for when you’re unsure what to do with your money or want to focus on the best financial resolutions for the upcoming year.
The first step in your financial plan is shoring up emergency savings.
While getting out of debt is always a wise financial goal, I encourage you to prioritize it in the context of your entire financial life. In some cases, aggressively paying down debt ahead of schedule is the wrong financial move. First, carefully consider how much emergency money you should have and how that stacks up with what’s actually in the bank.
A cash reserve should be your top financial priority because it keeps you from going into debt if you unexpectedly lose your job or business income or have significant unexpected expenses, like medical bills or car repairs.
How much emergency savings you need is different for everyone. For instance, if you’re the sole breadwinner for a large family, you may need a bigger financial cushion than a single person with no dependents.
A good rule of thumb is to accumulate at least 10% of your annual gross income.
Another way to determine your target savings is by basing it on your average monthly living expenses. For instance, add your costs and bills, such as food, housing, utilities, insurance, and transportation. Then multiply the total by a reasonable period, such as from three to six months.
If you’re struggling to build savings, you might start with a small goal, such as setting aside 1% of your income or $500 by a specific date. Then increase your goal annually until you reach a healthy reserve balance.
Even if you can only save a small amount each month, starting small is better than not starting at all! Consider automating your goal with a recurring transfer from your checking to your savings every week or month. After a while, you might not even miss the money.
Remember that your financial well-being depends on having cash to meet living expenses in an emergency, not on paying a lender ahead of schedule.
Note that your emergency money should never be invested because that exposes it to risk. Its purpose is safety, not growth. So, please keep it in an FDIC-insured high-interest savings account where it won’t lose value and will be sitting there when you need it.
To sum up, your first step in creating a financial plan is ensuring you have enough cash. Anytime you’re unsure about a financial decision or what to do with your money, ask yourself, “Do I have the right amount of emergency money in the bank?” If not, that should be your number one priority.
The second step in your financial plan is addressing any dangerous debts.
If you’re dealing with financial hardship and have dangerous debts, handle them next. Some of you may be struggling with overdue bills, debt in collections, tax liens, or debt balances with double-digit interest rates. Getting caught up or immediately addressing them is critical because they can destroy your financial health.
Note that you shouldn’t pay off low-interest debts, such as student loans and mortgages, ahead of schedule because they’re relatively inexpensive and come with tax deductions. Please save that step for later in your financial plan after you’ve taken care of the essentials.
The third step in creating a personal financial plan is investing for retirement.
Once you have enough emergency money or regular savings and tackle any dangerous debt, your next priority is investing for retirement.
If you take one lesson from this, it’s that not procrastinating your investing makes the difference between scraping by or having a comfortable lifestyle down the road.
A good rule of thumb is to invest at least 10% to 15% of your gross income for retirement as soon as you begin your career and have reasonable emergency savings in the bank. Remember that investments don’t count as your cash reserve because they’re not entirely liquid and get exposed to short-term risk.
The annual contribution limit for employees who participate in 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan is increased to $24,500, up from $23,500 for 2025.
The limit on annual contributions to an IRA has increased to $7,500 from $7,000. The IRA catch‑up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost‑of‑living adjustment is increased to $1,100, up from $1,000 for 2025.
The sooner you make maxing out a retirement account a habit, the better. Starting to invest early is like getting your retirement on sale because you contribute less and still see your account value mushroom over time–brilliant!
The fourth step in your financial plan is buying the right insurance.
An essential part of taking control of your finances is having adequate insurance. Many people get into debt in the first place because they don’t have enough of the right kinds of coverage—or they don’t have any insurance at all.
Make sure you have health insurance to protect yourself and those you love from an illness or accident jeopardizing your financial security. Also, review your auto and home or renters’ insurance coverage. If you rent and don’t have renters insurance, you need it.
And if you have family who would be financially hurt if you died, you need life insurance to protect them.
An often-overlooked coverage is disability insurance, which replaces a portion of your income if you get sick or injured and can’t work. You’re more likely to have a disability that prevents you from working than to die.
If you get these coverages through work, that’s terrific. However, if you don’t have employer-provided insurance or are self-employed, purchase these critical products on your own. It’s always a good idea to review your needs with a reputable insurance agent or a financial advisor.
The fifth step in your financial plan is setting other goals.
Once your savings, retirement, and insurance needs are on autopilot and you have money left over, it’s time to reach other financial goals.
Remember that student loans and mortgages come with relatively low interest rates and tax deductions, making them cost even less on an after-tax basis. That’s why debts with higher interest and no money-saving tax deductions, such as credit cards, personal loans, and auto loans, should typically get paid off first.
The bottom line is that goals outside of saving for emergencies and investing for retirement are wonderful if you can afford them. Make a list of your financial dreams, what they cost, and how much you can afford to spend on them each month.
So, before you rush to prepay a student loan or mortgage, make sure there isn’t a better use for your money. Being completely debt-free is a terrific goal—but keeping inexpensive debt and investing your excess cash for higher returns can make you wealthier in the long run.
Following them throughout the year will help you make the most of your money, protect it, and build wealth for a secure future.
