Three
Financial Resolutions You Can’t Afford Not to Make This Year...
And how to actually keep them
By Steven B. Smith
Every January, millions of Americans determine to shed a few pounds and to
finally get their finances in order. Unfortunately, most estimates indicate
that less than 30 percent of those well-intentioned resolutions make it
through the year. The reason most resolutions fail is because a plan is never
laid out to help achieve the goal. If you are serious about finally getting
your finances in order this year, here are the three resolutions you need to
make, along with easy steps to help you actually keep them.
1. Automate your finances.
Why it’s important: If it’s not easy, most of us will
quit before the New Year is a month old. The key to effectively managing your
money is tracking where it’s going, and how much money you have allocated for
specific categories. Paper and pen will do the trick, but be honest with
yourself, do you plan on keeping that paper and pen with you for the next
year, logging each and every purchase no matter how large or small? The
Internet allows you to track all your accounts with no manual effort, and will
even do all the math for you. If it’s automatic, you won’t get lazy, and you
won’t forget to do it either.
Managing your finances online may also help keep your money safe.
According to a 2005 study on identity theft by the Better Business Bureau and
Javelin Strategy and Research, “electronic monitoring provides greater safety
by sharply reducing time to detection, and potentially eliminates the paper
records and mail that are possible avenues to many identity theft cases.”
How to keep your resolution: Set up a secure online
budgeting system like Mvelopes Personal (www.mvelopes.com
).
The subscription service will automatically track your expenses from multiple
accounts and credit cards as well as provide you with balances of various
savings and spending categories. Seeing where you are spending your money
will let you know where you can cut back. Seeing your net worth rise in the
net worth tracking feature will keep you motivated. With a 30-day free trial,
if you do give up by February, you can simply call and cancel.
Set up automatic transfers with your bank to pay your mortgage and other
fixed payments to avoid missing a payment or incurring late fees. Use online
bill pay to save on envelopes, stamps, and time (Mvelopes Personal includes a
free bill pay service, and most banks now offer bill pay for little or no
extra). Set up an automatic transfer to a savings or money market account
once a month. Find a high interest bearing account to maximize your savings.
Many online banks, such as EmigrantDirect, are currently offering three to
four percent APY on savings accounts.
2. Stop paying interest and start earning it.
Why it’s important: According to Bankrate.com, if you
charge $1,000 on your credit card, and pay only the minimum payment (assuming
an interest rate of 15 percent and a 2.5 percent minimum payment), it will
take over 10 years to pay off and cost an additional $757.98 in interest.
Conversely, if you were to take only the amount you would be paying in
interest each month on that loan and invest it in an account earning ten
percent, it would grow to $1,594.92 over that 10 years.
Even if you’ve gotten deep into credit card debt and can’t pay it off
quickly, you can save a bundle by lowering your rate, and paying more than the
minimum. By dropping the interest rate on your credit card in the example
above to 11 percent and paying only $30 a month, you could pay off that $1,000
in just over three years with only $198.85 in interest.
How to keep your resolution: Always pay at least the
minimum payment on time, and if at all possible, pay your credit card balance
in full each month. Mvelopes Personal has a credit card tracking feature that
automatically sets aside the exact purchase amount each time a purchase is
made on your credit card to help you pay off the balance in full each month.
If you are carrying a balance from month to month, cut your spending to a
minimum and allocate all the extra money you can to paying off your debt. Use
the debt roll down principle to quickly reduce your debt. Make a list of all
your consumer debts and prioritize them in order of interest (highest to
lowest). Pay the minimum on all your debts and pay as much as you can on the
one with the highest rate. Once your first debt is paid off, roll that
payment amount into the next debt on your list.
Call your credit card issuer and try to negotiate a lower rate. If they
decline, let them know you plan to roll your balance to another card and
cancel the card with the higher rate. If your credit history is clean, you
should be able to find a card with a 0 percent introductory APR. Don’t make
any purchases on the new card as often the introductory period ends as soon as
you make your first purchase. Be careful the interest rate doesn’t skyrocket
after the introductory period, and make sure you cancel the card with the
higher rate to avoid simply running up a larger debt load.
Check your credit reports to make sure they’re accurate. The Fair Credit
Reporting Act (FCRA) requires each of the nationwide consumer reporting
companies — Equifax, Experian, and TransUnion — to provide you with a free
copy of your credit report, at your request, once every 12 months.
3. Stop procrastinating saving for your retirement.
Why it’s important: Time can be your biggest ally when
investing for retirement. For example, if you begin at age 25 and invest
$4,000 annually in a portfolio that provides a 10 percent average annual
return, then stop contributing after 10 years, your investment will grow to
$1,365,818.31 by the time you retire at 65. However, if you procrastinate
investing until you are 35, then contribute $4,000 annually in a portfolio
with the same 10 percent average annual return, and continue to contribute
every year for 30 years until retiring at 65, your investment will only grow
to $759,775.11. Even though you contributed $80,000 more over the life of the
investment in the second scenario, you still ended up with $600,000 less.
How to keep your resolution: Contribute at least enough
to your 401(k) to get the maximum company match. Talk to your HR department
to find out the details of your company’s plan. If your employer offers a
company match and you are not contributing to your plan, you are essentially
turning down a bonus every year. And since your contributions are taken out
on a pre-tax basis, as you increase your contribution, your taxable income
decreases, meaning you pay less in taxes.
Open a Roth IRA. Your money grows tax-deferred, and just so long as the
IRA has been open 5 years or more and you are at least 59 ½ when you start to
withdraw, there are no tax penalties for withdrawal. The maximum annual
contribution increases to $4,500 this year.
Make sure that no more than five percent of your portfolio for either your
401(k) or your Roth IRA is in a single stock. Diversifying is the best way to
ensure maximum growth over time while minimizing the risk and volatility of
the market. Select an index fund or target fund for an easy option that
requires little oversight. Fidelity, Vanguard and T. Row Price are among the
largest purveyors of mutual funds and all offer excellent funds for a variety
of investing styles.
From start to finish. Regardless of where you stand
financially, the New Year provides an excellent opportunity to review your
finances and make improvements. Make sure that this year you don’t just start
fresh, but that you also finish strong.
Steven B. Smith is
president and CEO of In2M Corporation
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