There’s opportunity in the air. Not only does a new calendar year offer a clean slate and the chance for some calculated resolution-making, but the improving economy should also give us a bit more money to work with as we strive for financial self-improvement in 2014.
The need for a little financial housecleaning is clear. The average household has roughly $6,700 in credit card debt, only two in five adults have a budget, 40% of people grade their personal finance knowledge at a C-level or below, and more than 70% of U.S. parents say their children don’t know the basics of money management.
It is the “how” that’s not quite as straightforward. How can we save more money and set a positive example for our children? WalletHub recently released a list of 14 money-saving resolutions for 2014, and I’ll share a few of the most important ones below.
- Get Your Bearings, Identify Savings & Budget: In order to improve your finances, you must first wrap your head around them. So review all of your insurance policies, credit card accounts, bank accounts, loans, utilities, monthly subscriptions, etc., to see what you’re spending money on each month as well as where savings opportunities might exist. No one is getting the best possible deal on all of their monthly expenses, after all, and most of us could stand to be far more disciplined with our spending and payment habits as well.
Your end goal is to develop a budget where your monthly take-home far exceeds your monthly expenses. So, once you’re confident that you’re getting the best possible deals on all of your bills, make a list of your recurring monthly expenses and compare it to your income. Most of us will need to make a variety of cuts, seeing as we’ve racked up more than $68 billion in credit card debt since the start of 2012. It’s also important to make room for monthly debt payments and savings contributions.
When you’ve nailed down a budget that enables you to meet your annual goals – getting out of debt or retiring by a certain year, for example – your job will be sticking to this plan. Given how busy most of us are these days, it’s helpful to remove undue temptation and automate as much as possible. For instance, enrolling in automatic bill-pay, asking that your credit limit be reduced, and automating monthly savings contributions will help mitigate temptation and human error.
- Build an Emergency Fund & Other Targeted Savings Accounts: Everyone needs a financial safety net. Without one, economic turmoil, a dip in the stock market, or an unexpected medical expense can lead to disaster: expensive debt, default, credit score damage, and maybe even bankruptcy. That’s why you actually want to tend to your emergency fund before beginning to pay off debt in earnest. Reversing the order, even if you’re successful in ridding yourself of debt, will leave you extremely vulnerable. Your goal should be to accrue about three-month’s take-home in a rainy day fund before beginning to chip away at amounts owed.
An emergency fund shouldn’t be your only savings account, however. Rather, you should have an account for each one of your individual savings goals – from a college fund for your kids to a retirement fund for you and your spouse. Strive to end the year with an extra 10% in each of these accounts.
- Reduce Non-Mortgage Debt by 15%: The distinction between luxury and necessity has become blurred in recent years, and we’ve grown used to spending beyond our means. Even the Great Recession wasn’t enough to whip us into shape, as we’ve racked up more than $115 billion in credit card debt since the beginning of 2011. To be fair, we’ve improved somewhat over the past few quarters, but we’re still just building up debt at a slower pace. We need to begin paying off what we owe and lead debt-neutral lifestyles if we want the economy to truly recover and there to be financial prosperity in our future.
The most efficient way to pay down debt is to concentrate on the balance with the highest interest rate because it is the most expensive. So make minimum payments across the rest of your balances, and put the rest of your monthly debt budget toward your most expensive debt until it has been paid in full. Then repeat until you’re debt free, at which time you can allocate your debt budget to savings and fun.
- Maximize Your Credit Standing: Good credit simply makes life easier, not to mention much less expensive. Your credit standing impacts more than just what credit card you can get and what interest rate you’ll pay on loans, after all. It also affects your insurance premiums, whether or not you can rent an apartment, your ability to buy or lease a car, and your eligibility for certain jobs. That’s why good credit can save you hundreds or even thousands of dollars a year.
The best way to build credit is to use a credit card responsibly. Credit cards report monthly usage information to the credit bureaus, and as long as this information is positive – reflecting on-time payments and reasonable credit utilization – your credit standing will naturally rise over time.
- Stress Test Your Finances: When you believe your 2014 financial overhaul to be complete, it will be time to test that theory. You can even turn this into a family game. For example, you can make a list of cards that detail various life events one must be ready for, such as an unexpected illness, the death of the family’s primary breadwinner, or a stock market crash. Each time you pull a card, you can verify that you have the savings, insurance, etc., necessary to handle the situation as well as have a family discussion about contingency plans. Not only will this help you identify potential areas of financial weakness, thereby giving you a game plan for 2015, but you’ll also begin familiarizi
Correcting bad habits is a tall task, especially when you’re denying yourself the instant gratification that comes with spending money. You therefore should not approach financial self-improvement as if it will be easy, because it won’t be. It will require sacrifice and discipline, but it also will be worthwhile at the end of the day. Not only will you save money, but you’ll be setting a good example for your kids. So find a wallet workmate for a bit of moral support, establish an incentive plan for you and your family to promote commitment, stick to your carefully-crafted plan, and your wallet will be sure to thank you by the end of the year!