New Year Resolutions To Improve Your Finances
January is the time of the year to take a step back and assess how you did last year and what you can differently to improve your financial situation this year. Here are some ideas on what to consider when you are deciding on resolutions for this year to improve your financial situation and how to go about successfully implementing them.
1. Track Your Expenses
The first and foremost step towards improving your financial situation is to understand your finances. The biggest element of understanding your finances is tracking your expenses. A good resolution to consider for this year would be to consistently track your expenses each month. You can do this by using a simple tool such as an excel sheet or google docs. Alternatively you can consider one of these popular apps to track your expenses.
I have personally been tracking my expense consistently every months since 2010. It was initially tough, however it has become a habit now. Tracking your expenses helps you identify areas where you tend to spend more. You can then try to focus efforts on reducing expenses in those areas where you tend to spend more.
2. Eliminate and/or Consolidate Your Credit Card Debt
The average credit card debt per American household currently stands at $5,700 and 41.2% of all households carry some sort of credit card debt according to a report by ValuePenguin. Credit card debt is by far one of the most expensive debts to carry. The average APR across all credit cards is about 17.47 %.
The ideal situation would be for you to take a resolution to pay off all your credit card debt this year if you can afford to. This would be a huge load off your shoulders. But, I do acknowledge the fact that it’s easier said than done considering other financial obligations you may have. If you cannot pay off all your credit card debt, at least try consolidating your credit card debt using these cheaper alternatives.
Low-interest balance transfers – You could apply for a new credit card which offer low interest introductory balance transfer. There are also several cards that would provide 0% APR on balance transfers up to 1 year. You will then have up to 1 year to pay off all your debt interest free.
Home equity line of credit – If you have enough equity built into your house, you could consider getting a home equity line of credit to pay off all your credit card debts. The average rate for home equity line of credit as of December, 2018 was about 4.82% which is significantly lower than the rate for credit card debt.
Personal loans –You could apply for a low interest personal loan to consolidate your credit card debt. Peer-to-Peer lending services such as Prosper, Upstart, Lending Club and Peerform provide personal loans at very competitive rates. You can apply for a personal loans in one of these platforms in under thirty minutes.
3. Save For Retirement
If you are employed and your company offers a 401(k) plan, consider contributing to it this year if you aren’t already doing so. Typically there is a minimum amount that you need to contribute to your 401(k) to get the full company match. Consider at least contributing the minimum amount to get the full company match. The company match in your 401(k) is essentially FREE money and it’s a sacrilege to not contributing the minimum required amount to ensure you get the fully company match.
This is the time of the year when everyone gets a performance appraisal. One way you could start contributing to you retirement account is by transferring the entire amount that you get as performance appraisal into your retirement account. This should not impact your finances because you will only be transferring you incremental salary increase into your retirement account and this should not impact your take home pay.
If you already contribute to a retirement account, consider increasing your contribution by a couple of percent this year. This will not only take you one step closer to your retirement goal but will also help reduce your taxable income.
4. Create A Budget
I personally do not have a budget. But, this is something I plan on taking as a resolution this year. Based on my research everyone should have a budget to understand your income, your expenses and your savings. This will help inform how well you are doing with respect to achieving your financial goals. Creating a budget is relatively easy. There are several online tools these days to create a budget. One in particular I seemed to like is the budget calculator by bankrate.com.
A budget is a great planning/modeling tool which tells you how much you should make or how much you should spend in order be able to save a certain amount of money. In order to start your budget you need to first start tracking your finances. Without tracking your finances you wont be able to create an accurate budget. It’s not just sufficient to create a budget. The most important part of creating a budget is periodically checking in to see how you are doing against you budget and making changes as needed to ensure you don’t overshoot your budget.
5. Minimize Expenses
This is one of the most common and easiest resolutions to carry. However, it’s the most difficult to implement.
There are so many little things you can do to minimize spending such as bringing your lunch to work a few days a week. not spending any money couple of days a week etc. See this blog post for more tricks on how to minimize expenses . I believe spending money unnecessarily on things that are not really needed is a bad habit and should be broken.
Just make sure you don’t make yourself miserable trying to cut down on your expenses. Start small and work your way up. Minimizing expense is not a sprint, it’s more like a marathon. It takes time and effort. The trick is to set small achievable goals to minimize expenses and being consistent with it.
6. Invest Your Money
The only investment for most of the people I know is an employee sponsored retirement account. A retirement account alone is not sufficient. You need to diversify your investments.
This new year consider opening a brokerage account (fidelity, etrade, robinhood, webull) and invest money in stocks. If you are not comfortable buying individual stocks, invest in mutual funds or even a CD.
For people who are not comfortable investing on their own there are several online investment service such as betterment and wealthfront who will invest your money for a menial fees of 0.25%. All you need to do is answer a few questions in order for them to assess you risk level and they would decide on where to invest your money based on your risk level.
Money sitting idly (above your emergency funds) in your bank account is essentially losing value when accounted for inflation. So, consider putting your money to work by investing in any of the tools mentioned above that you feel the most comfortable with.
7. Create/Update Your Will
A will is an important tool that will protect your final wishes. The new year is a great opportunity to sit down and plan out exactly how you want your assets allocated or to assign a guardian if you have a minor child.
You need a will even if you don’t have a lot of assets. A will doesn’t have to be complicated or terribly expensive, and the peace of mind it provides for you and your loved ones is invaluable.”
If you’re unsure of where to start, read my blog on everything you need to know about a will.
Succeeding In Your Resolutions
Most of the new year resolutions fail within a month. The trick to ensuring you succeed in your new year resolutions is to set small attainable goals rather than setting lofty goals.
We are social beings and we need reassurance that we are succeeding in our endeavors. If not, we tend to get demotivated and give up on our resolutions. By setting up small goals and achieving them, you are subconsciously assuring yourself that you are capable of doing great things and this feeling of achievement eventually becomes addictive and you would want to achieve more.
I hope you found this post both helpful and inspiring. I have a feeling this is gonna be a great year for me especially since I have already lost five pounds since the beginning of the year and I hope this turns out to be a great year for you as well.
Share any of your financial New Year’s Resolutions that you are considering in the comments below.