My 3 financial New Year resolutions

It’s almost the time of year where we think about what we want to achieve next year, what resolutions we want to make.

Many people will make fitness resolutions and fail within a couple of months, yours truly included!

My three resolutions don’t take physical effort, so there’s a good chance I’ll succeed. Plus, they’re meant to last forever, a permanent change of mindset is much more likely to succeed.

Never underestimate compounding

Compounding was described by Albert Einstein as the eighth wonder of the world, for good reason.

It’s easy to understand when a share price or an earnings per share increases by 10% in a year. It gets much harder to visualise how much growth compounding creates if a share price grows 10% in year one, then grows 12% in year two, 8% in year three and so on.

That’s why shares like Challenger Ltd (ASX: CGF) and Ramsay Health Care Limited (ASX: RHC) are such powerful long-term investments, they steadily grow year after year.

I’m often surprised by the power of compounding, even though I write about shares every day.

Thinking about the power of compounding gives me more confidence investing in shares.

Be pickier about value

It’s impossible to know what share prices will do in the near-future, we have no control over the market.

However, we do have control over the price that we pay for the shares we buy.

You can play all the mind games you want to justify buying a share at a certain price. If you really want a share in your portfolio, then you may end up overpaying for it.

I overpaid when I invested in Greencross Limited (ASX: GXL) shares a couple of years ago. The share price had fallen and Greencross is a good business, but I needed to be more careful about the price I invested at. I haven’t made the same mistake for a while now, though that could change.

Keep some cash

The Australian and global share markets have been on a bull run for nearly a decade.

It is utterly inconceivable that there won’t be another sizeable crash in the future. Therefore, each week we get closer to the next drop.

There’s nothing wrong with this reality. Our share market is at its current level despite all the wars, recessions and the GFC. It’s just something to keep in the back of one’s mind.

It’s probably a good idea to keep more cash on hand just in-case. That cash may be needed for personal uses, such as reduced income or losing a job. It would also be handy to buy some shares at a discounted price.

Foolish takeaway

Those are my three resolutions for the next year and I intend to stick to them.

Another good financial change would be to focus only on quality shares, just like these top stocks.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited, Greencross Limited, and Ramsay Health Care Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited and Greencross Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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