Financial tips to start the new year

Money can be a top stressor for people. A 2022 survey found that the top sources of stress for American adults were the rise in the cost of everyday items due to inflation, supply chain issues and global uncertainty.

In 2023, total household debt rose to an average of $17.06 trillion and credit card balances reached $1.03 trillion.

But according to ASU finance experts, avoiding your finances can cause more stress and larger financial problems than addressing your relationship with money and developing a game plan to create healthy finances early on. 

Clinical Assistant Professor Ives Machiz and Associate Teaching Professor Debra Radway teach finance courses at Arizona State Univerisity's W. P. Carey School of Business.

A practicing financial planner for more than 20 years, Machiz’s research focus is on the relationship between financial education and financial health.

Radway’s expertise encompasses financial planning and investment management, a topic she also teaches in the course Estate Planning Strategies through ASU Online. She guides students through personal estate plan evaluation and planning for a client’s objectives and wealth.

“We are often stressed by money when we feel our spending is out of control; the best way to minimize financial stress is to review your financial situation each year,” Radway said. “This allows you to take action if needed.”

Taking stock of your finances is the first step to starting a healthy relationship in how you approach money.

“Given the integral nature of financial literacy to later financial success," Machiz said, "financial education represents a key to accessing economnic success.”

Radway and Machiz share some insight into how people can tackle their finances in the new year. 

Question: What is the connection between financial education and financial health?

Machiz: Financial education is associated with improved financial health, particularly with respect to accumulating assets and building wealth. Financial education increases financial literacy and helps individuals make better financial decisions.

Q: In your experience, what is the most common reason people avoid looking at their finances?

Radway: Usually, there are two reasons. One: They are afraid of what they are going to see. They avoid looking at it to avoid addressing choices they need to make. Two: Some people don't know where to start because of a lack of financial education.  

Q: When are people typically exposed to financial literacy education?

Machiz: Most people do not have formal financial literacy education. For those who do, common sources are classes in high school, college and/or the workplace. Many individuals have informal exposure to personal finance through TV, the internet, friends and whatever financial lessons they learn from their family. The often random accumulation of financial concepts is not ideal.

The informal nature of the process for many people means that many have little financial knowledge, and perhaps have a great deal of misinformation. Americans score fairly low on assessments of financial knowledge and financial capability. In a complex economy, financial literacy is a key skill for making positive financial decisions. Remember, as early as age 18, many individuals begin making financial decisions that will affect them for the rest of their lives.

Q: At what age or stage in life should someone make financial planning a priority? 

Radway: Once you have a paycheck coming in, you should make financial planning a priority. Financial planning is about making good financial choices with your money. If you start when you first begin making money, you have a higher likelihood of learning the saving and spending behaviors that will allow you to reach your goals of buying a house, saving for retirement and helping your kids with college.

Q: What is the first step to financial wellness?

Machiz: The first step to financial wellness is the development of financial literacy and capability. This is a combination of financial knowledge and confidence in making financial decisions. This can be attained in a number of ways, including financial education courses, self-study and research, or hiring a qualified financial advisor. The key is to be proactive about becoming financially literate, and then proceeding to assess where you are and where you want to be financially.

What can people do?

Instead of addressing multiple things at one time — which can be overwhelming — Machiz and Radway share a checklist of things people can do throughout the year to make taking inventory and financial organization more manageable.

January: Cash flow

Review your spending last year and assess where you are spending money and if you are getting value from that spending. If you track your expenses, this exercise is easy. If you do not track expenses, see if you can print out a year-end statement from your credit card company or bank. Highlight areas where you don’t think you got as much benefit as you spent on the item

February: Wills and powers of attorney

Review your wills and determine if your money will go to the people and causes you care about in the case of death. Also, review your powers of attorney for property and health care to make sure you have someone who could handle your affairs in case of incapacity.

March: Beneficiary designations and titling

An estate plan also includes account titling and beneficiaries. Everyone should review their account titling and beneficiaries listed on retirement plans and life insurance once a year to determine if the asset will go through your will or directly to your loved ones or causes you care about. Accounts that are titled Joint Tenants with Rights of Survivorship or Tenancy by Entirety automatically transfer and do not go through your will. Also, accounts with beneficiary designations automatically transfer at death.

April: Tax withholding

Review your tax return to see how much you are paying in taxes and determine if you are having enough or too much withheld from your paycheck. If you are getting a refund, you may be able to adjust your withholding to get more money in each paycheck.

May: Homeowners, renters and auto insurance

Review your policies before you leave town for vacation. Make sure you have enough coverage and the right types of coverage. Liability and property damage covers the cost of someone else’s car if you are found to be responsible for the accident. Collision covers the cost of your car if your car is damaged in a collision, and comprehensive (covers the cost) if your car is damaged in something other than a collision. Your insurance agent should be willing to walk through your coverages and discuss if there is adequate protection.

June: Asset allocation

Look at your investment accounts and determine how much you have invested in stocks, bonds and cash. Compare this to the typical allocation for your risk tolerance.

July: Review social security statements and pension plans

Review your retirement plans and determine how much of your retirement funds will be provided by these sources. Also, log into ssa.gov and review your Social Security statement.  You can see the impact of taking your Social Security and pensions early or delayed.

August: Credit report/credit score 

Pull your free credit report at annualcreditreport.com and make sure that there are not any mistakes. See what your current credit score is and review your loans and credit cards to see if you would qualify for a better rate.

September: Contributions to retirement plans and your company match

Review your current retirement plan and determine how much you are contributing and if you should adjust it. Confirm the amount of "free money," if any, that your company provides in a company match. Make sure you are contributing enough to fully get the match.  

October: Health insurance/disability

Review your current health and disability coverage and determine if the plan, coverage and health network still meet your needs. Determine how much you should put in an FSA account.

November: Life insurance 

Review your life insurance to make sure your loved ones are protected in the case of an early death. Although, your employer may provide life insurance of one times your salary. If you have dependents, this will most likely not be enough.  

December: Net worth report 

Create and/or update your net worth report. This will ensure you understand everything you own and everything you owe and allow you to track your financial progress over the past year. Just make a list of everything you own (i.e., cars, houses, investment accounts, retirement accounts, etc.) then make a list of everything you owe (i.e., student loans, credit card bills, car payments, mortgage payments). Net worth equals amount you own minus amount you owe. Reviewing this every December helps you understand the financial progress you have made during the year.