By Chuck Jaffe
Published: Jan 2, 2015 11:16 a.m. ET
If you made New Year’s resolutions this year, there’s a good chance they’ll be broken within hours of when you read this.
In fact, the big problem with resolutions is that the resolve typically is shot the minute there’s a single misstep on the path toward the purported mission.
It’s why you probably can’t find many friends who have, over the course of a lifetime, followed through on as many as a half-dozen resolutions. Moreover, except for the most obvious willpower issues — like weight, smoking or bad habits — studies show most people can’t remember what they resolved to do months later.
Rather than making resolutions, therefore, try answering the following five questions today, with a plan to answer them again when 2015 comes to a close.
Seeing how the answers change will give you a good handle on your long-term emotions around money. Moreover, if your answer convinces you that a change in behavior is necessary, it may give you the courage to improve your financial life.
Mind you, these aren’t the only questions worth answering at this time of year, nor do they promise the most thorough self-examination; for that, you’d need to do a deeper dive into your financial planning. They will, however, give you a good idea of where you stand and what can/must improve for you to be better off a year from now than you are today.
What’s your net worth?
This is a simple calculation worth doing every year. Add up the value of everything you own, subtract everything you owe, and whatever is left over is your net worth. In any given year, it might rise or fall based entirely on market-value fluctuations for your property and investments, or based on what you save and spend.
There’s a lot of argument over just how to properly use net worth to gauge where you stand in life, but a rule of thumb posited by a number of financial advisers is that by the time you reach age 72, you’d like your net worth to equal 20 times your annual spending.
If you can’t see yourself making that number — or coming close to it by the time you reach retirement — start looking at what has to change. Obviously, a continuing bull market could help overcome a lack of savings or overspending that has hurt your net worth, but the market could just as easily take away any excess.
The moral of the story is that if your net worth scares you now, work to be less frightened when you check it next year.
How many times your current (or last) salary do you have in retirement savings?
A Fidelity Investments study in 2012 developed a solid plan for checking your retirement readiness. The idea was to look at your current salary and see how much of that amount you have saved at various ages if you want to be able to retire at age 67 and live on 85 percent of final pay.
To get there, the average worker should have saved about a year’s worth of salary in all of their retirement accounts at age 35, three times at age 45, five times at age 55 and eight times by age 67.
Thus, a worker earning $75,000 at age 55 should have $375,000 in retirement savings.
The measure isn’t perfect but this will do when it comes to seeing whether you are on the right track.
If you’re not, this might scare you into moving in a better direction.
What’s your debt-payment burden?
Your debt-payment burden — the ratio of debt to disposable income — is something lenders use to decide whether you’re a good credit risk, as a snapshot of how well you manage your debts.
Start by determining your monthly disposable income. That’s take-home pay, investment income, bonuses, alimony, rent and whatever else you have available to pay the bills. (Take your annual totals from 2014 and divide the result by 12 to get a monthly figure.)
Next, tally your monthly payments on all consumer loans. These include student loans, auto loans, home-equity loans, checking account overdrafts, credit-card payments, personal loans and any money you owe friends or relatives. This does not include your mortgage payment.
Once you have totaled these debts, divide this number by your monthly disposable income and multiply by 100. The result is the percentage of your disposable income currently being used to repay consumer debt.
Experts say many people can live comfortably — and still save money — with a debt-payment burden of 15% to 20%; even debt payments equaling 30% of take-home income can work for people with modest living and housing expenses, spending discipline and enough money set aside to cover emergency needs.
But your debt burden is definitely too high if most or all of your monthly income is being spent on debt service.
If that’s the case, cut spending, review the household budget and see how you can reduce your burden going forward.
If you don’t see the next New Year, what would happen to your family financially?
No one likes thinking about their own mortality, but if the answer scares you because your family is not protected, or because your assets would not be distributed in accordance with your current wishes, then you need to check up on insurance protection, estate planning and more.
This question typically doesn’t bother people who have done adequate advance planning, and the wrong time to find out that you have a problem is when you have real concerns about your health and welfare and your ability to set things right.
When reviewing your finances, what is the single thing that makes you feel the best? The worst?
This two-part question is simple and emotional, and it will tell you what you most need to work on (your fears) and where you have made the most progress.
If a market decline is your biggest fear, you need to look at making portfolio adjustments, whereas if job loss is the biggest fear, then preparation, working on emergency funds and more would make sense.
Meanwhile, what you feel good about is going to be where you either have strength or are making progress. Make sure you protect that good feeling, and the financial situation creating it, while trying to bring other key areas up to the same level of confidence.