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. Millions of Americans are also considering financial resolutions to get themselves in shape.
A recent survey from Fidelity Investments reveals that 31% of Americans are focusing on money goals in 2015, down from the record high of 43% last year, but still an impressive amount. People who made financial resolutions at the start of 2014 are more likely to report optimism about their current financial position. Unfortunately, making a resolution is easier than keeping one. People typically fall into the same routine just days or weeks into a new year. Even so, 42% of people find sticking to financial resolutions easier than other common resolutions.
“Historically, everyone is optimistic at their starting point, they’re determined. You see this all the time at the gym. People come in but two months later they’re gone. I think people fail at resolutions because they don’t set realistic expectations,” explains Kathleen Hastings, CFP, Portfolio Manager at FBB Capital Partners, in an interview. “I think the most important thing to do is take a look at your goals and make sure they are achievable from the beginning. If you set yourself for failure, you’ll lose interest.”
Let’s take a look at five simple financial resolutions that anyone can commit to keeping in 2015.
1. Make 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 by helping you find items you purchased but never really used. After all, do you really need those knick knacks around the house just collecting dust?
The first step toward a realistic budget is to record every current expense so you know where you stand. 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 increase income or decrease expenses.
Hastings recommends using a program such as Quicken or Mint to help visualize your expenses. “Whether you need a budget or not, you need to know how much you spend because that helps determine what you need for retirement.”
The fastest way to improve your budget in 2015 is to pay yourself first. This is a golden rule in personal finance and forces you to place savings ahead of spending. Instead of trying to save what money is left over at the end of the month, which always seems to be less than predicted, you should place money aside before spending your paycheck on anything else. This does not mean you should stop paying monthly bills in order to save. Instead, adjust your spending habits so you find a healthy balance between savings, necessities, and wants.
2. Reduce debt with a plan
The average American household owes $6,870 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 2015 will not only add to your total debt load but also increase interest costs.
The snowball approach is one of the most popular methods for debt reduction. Breaking conventional wisdom, this strategy ignores interest rates. Pay the minimum amount required on all credit card balances except the smallest. Place as much money as you can toward the smallest balance until it’s completely paid off. Then take the money you were using on that card to apply it toward the next smallest balance until that one is paid off as well. Repeat this process until you have zero credit card debt.
This approach is best used for people who get discouraged easily. Sending the majority of your monthly debt repayment to the credit card balance with the highest interest rate is more efficient, but it’s called personal finance for a reason. Some people need the satisfaction of paying off balances to keep them motivated. Use what works for you.
3. Start saving for emergencies
Saving more money has been the most popular financial resolution for five consecutive 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, even if it’s only $50 per month. You have to start somewhere in order to build healthy habits for the long run.
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 33 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. 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 accomplished within the first week of the year.
As Hastings notes, “If you fail on your resolution in January, start in February. It’s an arbitrary date that doesn’t matter. Reset your resolution and begin fresh. It doesn’t have to be January 1.”
A survey from Ally Bank finds that saving money is one of the best habits to increase happiness. Among those polled with savings accounts, 38% of people said they felt extremely or very happy. In comparison, only 29% of those without savings accounts felt the same way. Overall, 84% of people said saving money makes them feel good — ahead of eating healthy at 74% and enjoying work at 68%.
4. Start planning for retirement
Retirement may feel like a pipe dream given your financial situation, but creating a plan greatly improves your odds at success. 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 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 advisor 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. This resolution can be accomplished within the first week of the year.
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. It can take several months to resolve a dispute, but it may significantly boost your credit score.
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