The beginning of a new year is a great time to commit toward improving your financial life. Do you have an old 401(k) that’s riddled with haram holdings, but haven’t found the time to correct it? Perhaps you’re busy working hard only to feel like your savings going nowhere. Is your financial life so chaotic you don’t know where you are relative to achieving any of your goals? Whatever the case, now is the time to set your intentions and establish good habits. Of course, achieving your goals won’t happen overnight. It’s also easy to get sidetracked as the year progresses.
Here are 5 financial resolutions, with measurable goals, to hold yourself accountable.
Get a financial plan
The best place to organize all the pieces of your financial life is within a financial plan. With a financial plan, you’ll be better able to focus on your goals and understand what it will take to achieve them. Your plan will help you balance competing financial priorities. You’ll then be able to implement specific strategies and choose appropriate products or services. You can even incorporate your zakah and other charitable giving within your overall planning. Since your goals will be well-defined and measurable, it’ll be much easier to hold yourself accountable.
Financial planning is an ongoing process. It’s flexible enough to accommodate for life changes, market volatility and even changes in tax law. Best of all, you’ll always know where you stand.
Take full advantage of retirement plans
If your employer offers a 401(k) plan, take full advantage of it. Don’t just defer the minimum to get your employer’s match. The maximum salary contribution you can make to your 401(k) is published on the IRS website. If you can afford to, make the maximum salary deferral (including any catch-up contributions if you’re over age 50). For Muslim investors looking to invest in halal funds, ask if your plan has a self-directed brokerage option. This will allow you to invest in any halal mutual funds, including the Azzad Funds.
If you have any more dollars you can save, look into saving in a traditional IRA or Roth IRA. If you’re married and your spouse doesn’t work, consider saving in an IRA for them.
If you’re self-employed, seriously consider establishing a retirement plan. A business retirement plan (especially a pension plan combined with a 401(k)) can be a powerful way to save on taxes while maximizing your retirement savings. Even when accounting for the costs of administering a business retirement plan, (i.e., costs for a third party administrator and/or actuary, employee contributions, etc.) a business retirement plan offers business owners one of the most powerful savings tools.
In this tight labor market, in addition to offering competitive salaries, providing your employees with a robust benefits package that includes a retirement plan is critical.
Establish an emergency fund
Without an adequate emergency fund, a crisis could be financially devastating. Start by estimating your monthly costs for these 4 critical expenses: housing, food, transportation, and health costs then multiply by 6. Do you have debt? How secure is your current job? Your income? Is there a recession on the horizon? How’s your health? The less secure your situation, the more you should save in your emergency fund. The actual size of your fund will of course depend on your unique situation. It’s best to overestimate your expenses and save more rather than underestimate.
Work with your Azzad advisor to create a conservative investment plan for the account, ideally one that is overweight in a short duration halal fixed income fund like the Azzad Wise Capital Fund. Finally, be sure to review your emergency fund periodically. Since personal and financial circumstances can often change, you’ll want to make sure your emergency fund is still relevant.
Roll over old employer retirement plans
Switching jobs presents new opportunities, including the opportunity to convert more of your retirement savings into halal investments. You generally don’t want to leave your 401(k) behind. The most obvious reason is because you may lose track of it. But for Muslim investors, it’s also the time to align your savings with your Islamic values. Consolidating your retirement savings by rolling over a 401(k) into an IRA rollover can clarify your financial picture. So, if you have any old 401(k) plans, contact your broker and get them into an IRA rollover account.
Commit to saving more but don’t forget to enjoy life
There’s no broad consensus as to how much each person should save. It really depends on why you’re saving and where you are in your stage of life. Are you saving to become financially independent? Leave behind a legacy? Travel the world in retirement?
Aim to save and invest around 15%-25% of your gross income (that includes retirement savings). The goal is to be saving more than you’re spending. Also, those who make more money need to save and invest a higher percentage of their income. Keep in mind that Social Security phases out for high income earners and will cover less as your income increases.
For some, saving too much (or refusing to spend your money even after retirement) can mean living an unenjoyable life. This fear of running out of money stems from a lack of feeling financially secure. Such deprivation is unhealthy. Instead, be intentional with your spending. Once again, financial planning can help. It can account for rising (or declining) markets and other unknowns. Daydreaming about that trip to Italy? Schedule a call with your Azzad advisor. You just might be able to accommodate it in your financial plan.