It’s that time of the year again, when many people try to improve themselves through resolutions. This often includes getting more exercise, eating healthier, or quitting smoking. However, New Year’s resolutions are not limited to our physical well-being. More Americans than ever are considering financial resolutions.
A recent report from Fidelity Investments shows that more than half of Americans are focusing on short-term and long-term money goals in 2014. In comparison, only 35 percent said they considered financial resolutions in 2009. “These findings suggest individuals are taking more control over financial matters, leading them to feel better about their personal situations, which is a great way to ring in the New Year,” said Ken Hevert, Fidelity’s vice president of retirement products.
Unfortunately, making a resolution is a lot easier than keeping one. People typically fall into the same routine just weeks into a new year. Even so, there are five simple financial resolutions that anyone can commit to keeping with minimal effort.
1. Develop a realistic budget
Many people fear making a budget because it will show just how much money is being wasted, but it’s impossible to know where all your money is being spent if you keep your head in the sand. Tracking your expenses can also help you save money. After all, do you really need those extra cable channels showing reruns of “Keeping Up with the Kardashians”?
A realistic budget means accounting for every expense and writing it down. Daily expenses are easy to remember, but don’t forget to factor in payments that only occur once a quarter or once a year. Entertainment expenses like dining out should also be included. The goal of a budget is to make sure you are cash-flow positive. If you spend more than you make, it’s time to face reality and make changes.
2. Reduce debt
The average American household owes $6,690 in credit card debt, according to the latest analysis from CardHub.com. Piling new debt on top of last year’s debt is not a good idea. If you have consumer debt, do yourself a favor: stop digging a deeper hole. More uncontrolled spending and debt in 2014 will not only add to your total debt load but also increase interest costs.
There are a couple of popular methods to reduce credit card debt, with the first being the snowball approach. This strategy involves sending the majority of your monthly debt payment to the credit card balance with the highest interest rate. Doing this will cut down on interest expenses and help you pay off debt more efficiently. Once the highest interest rate debt is paid off, repeat the process as many times as necessary for the other cards. However, if you are the type of person that feels more satisfaction by paying off balances as quickly as possible, the snowball approach may be a difficult strategy to maintain in the long run.
Another method is the island approach. This involves using different cards for different transactions. For example, you could transfer your existing high-interest debt to a card charging lower or even zero percent interest in order to escape the debt sooner. You could also use different cash-back enhanced cards to supplement your spending. Credit cards from Discover Financial Services and JPMorgan Chase are known for attractive bonus programs.
3. Start saving
Saving more money has been the most popular financial resolution for the past four years, yet Americans are notorious for being poor savers. With positive cash flow from your realistic budget, you should start placing money aside for life’s little surprises as soon as possible.
Financial advisers often suggest an emergency savings fund of around eight months’ salary. The simple reason for this is that it takes the average unemployed person about 35 weeks to find a new job. If you don’t have an emergency savings fund, start one. It will grow over time and be there when you need it the most. You will also become less dependent on credit cards for unexpected expenses. If you make your savings automatic with the help of an online savings account, this resolution could be the easiest one to keep.
4. Plan for retirement
Retirement may feel like a pipe dream given the current economic landscape, but creating a plan greatly improves your odds. Not including money put toward mortgage payments or home improvements, people with no financial planning save an average of $77 per month. Those with some kind of informal planning such as “my own thoughts” or “my own approximate calculation” save an average of $335 per month, according to a recent study by HSBC.
Saving for retirement on a regular basis is key to building a bigger nest egg. Regular savers polled in the study accumulated an average of $168,099 in retirement savings and investments compared to only $86,529 by those who only save from time to time.
Naturally, you are the person that cares the most about your money, but seeking the help of a well-researched and professional financial adviser can greatly improve your chances of retiring. Respondents with average incomes who use professional financial advice when planning for retirement have the greatest levels of retirement and other savings. Those who had a financial plan in place with a professional had so far accumulated $203,228 in retirement savings, compared to only $98,005 among those without a financial adviser.
5. Check your credit report
Your credit report is one of the great mysteries of personal finance. Containing a significant portion of your financial activities, the report helps create your credit score. Yet the exact formula for calculating a credit score is unknown to the public, and a wide variety of organizations can check your credit report without permission.
Since credit reports may affect your mortgage rates, credit card approvals, insurance rates, apartment requests, and even job applications, Americans should make it a habit to check their reports at least once a year by using AnnualCreditReport.com, the only authorized site that is required by law to provide a free copy of your credit report every 12 months from each credit reporting company. If you see an error, contact the credit reporting company and the information provider — the entity that provides information about you to a credit reporting company.
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