For many people, the new year means a whole new look to your paycheck. Maybe you received a raise or a cost of living increase. Chances are your health insurance premiums went up. And, of course, taxes may be coming out at a slightly different rate.
Whenever I get my first paycheck in the new year, I always closely look at my paystub compared to last year’s and determine where I can make adjustments to better reach my savings goals.
One of my favorite plans to build wealth is what I call the “1 to 5 Plan.” I developed this plan for myself, but you can make adjustments depending on where you are currently at and your goals.
If you are looking for a great way to kickstart your year and improve your finances, give my “1 to 5 Plan” a try and let me know your thoughts.
What is the “1 to 5 Plan?”
It’s simple, just increase contributions to different financial goals by one to five percent. Here’s a more detailed breakdown.
Increase Your Retirement Contribution by 1%
You are probably contributing to your work’s retirement account based on a percentage of your annual salary. The goal is that each year you increase your percentage by 1% of your salary.
So, if you earn $70,000 a year and currently contribute 3% of your salary towards retirement ($2,000 per year), you would increase this by 1%. This means that this upcoming year you would contribute 4% of your salary towards retirement. ($2,800 a year.)
Increase Your Kid’s College Fund Savings by 2%
If you have children and are currently putting money towards a college savings account, try increasing that amount by 2% this year. So if you currently save $100/month, start saving $102.
No, it’s not a lot. However, the point is to continually increase your savings year over year.
Increase Your Fun Account Savings by 3%
If you don’t have a “Fun Account,” this is the year to set one up if you can. Even if you can only fund it with $10 or $20 a month, after COVID we are all going to need to book a mini-vacation or a date night.
If your Fun Account is already funded, increase your regular savings in it by 3%.
Increase Your Emergency Savings by 4%
Besides saving for retirement and paying off debt, building an emergency savings fund is one of the most important things you can do to secure your financial future. But once you’ve saved up, then what?
It’s important to continue building your emergency savings by enough to cover inflation and cost of living increases. Take a look at your current emergency savings, and work to increase the overall value by 4% by the end of the year.
Increase Your Monthly Debt Reduction Payments by 5%
Whether you have monthly credit card payments, car payments, or a mortgage payment, it’s critical to work towards paying off debt for your financial security. The last step in the “1-5 Plan” is to increase your debt reduction payments by 5% each month.
At the start of a new year, review your paystub along with your goals and develop a plan to increase your savings and decrease your debt.