PERSONAL FINANCE: Financial Resolutions That Really Work – Part 2
In last week’s column, I discussed New Year’s financial resolutions recommending that you start by setting goals, getting organized, and budgeting. Today, I’m going to add specific actions that you can start implementing right now.
It is often said that the best way to reduce debt is to reduce credit cards. I find this strategy extreme and a poor substitute for discipline and smart decisions. Tackling debt is complicated, and many people fail to meet debt resolutions because they simply don’t know where to start or don’t consider the larger role debt plays in our society. financial life. Debt is not necessarily bad. Personally, the debt allowed me to finish my studies, buy a house I could never afford with cash, and take vacations using the miles on my credit card. But unchecked, debt can be a hindrance that prevents us from achieving our larger financial goals.
Most debt falls into one of two categories: installment debt and revolving debt. Installment debt typically includes mortgages, auto loans, and student loans, which typically have fixed interest rates and fixed monthly payments. You can get your installment debt under control just by making your required monthly payments on time, which also helps build your credit.
Examples of revolving debt are credit cards and home equity lines of credit (HELOCs). In general, it is best to pay off revolving debt first. It rarely makes sense to pay off relatively low interest rate debt (like prepaying your mortgage) while you have outstanding revolving debt, which is usually more expensive and is subject to changes in rates and payments. minimum.
If you haven’t already, consider refinancing your mortgage and student debt. While current interest rates may rise from their lows, they are still cheap compared to historical rates. When refinancing your mortgage, beware of “teaser” rates that reset after a short period of time. I recommend against an adjustable rate that resets in less than five or seven years and urge you to be careful of the rate adjustment conditions. However, depending on your future plans, a long-term fixed rate mortgage may not be your best bet either. There are online rate calculators that can help you calculate the numbers.
More than half of all Americans have credit card balances; it’s no surprise that paying off credit cards is the most common financial resolution of the new year. Doing so is a “twofer” because improving your credit rating is also a common resolution. If you have high interest credit card balances, you may want to consider using a powerful debt management tool often referred to as a “balance transfer credit card”. You’ll have to do some research and comparisons online, but the brief explanation is that you can open a new card and transfer your existing balances (within a limited time), at no or reasonable charge. These cards offer a very interesting functionality: for a fixed period, they are without interest. During this interest-free grace period, any payments you make are used to reduce the principal balance on the card. Even during this grace period, you must make payments at least equal to what you paid before. Check out this option.
When it comes to credit cards, be sure to compare their “points” programs and other benefits. My favorite card is the Amazon Rewards Signature Visa, which, among other benefits, immediately reimburses five percent of Amazon Prime online purchases.
One final word on credit: If checking your credit score isn’t one of your financial resolutions, please add it to the list. There are sources online that you can use to access your credit score and, if necessary, repair the score. My favorite online source is annualcreditreport.com, which provides you with a free copy of your credit score. The better your credit rating, the easier it is to get credit at cheaper rates.
The second most common New Year’s resolution after paying off credit card debt is to put money aside for savings and investments. Whether you want to build up a nest egg to buy a first home, finance your children’s education, or set aside funds for your retirement, having clear goals, like most habits, is key to your success.
For many, the most proven way to build wealth is to create a put-and-forget method to put money aside. Does your employer offer an automatic pay deduction plan? Alternatively, you can consider a systematic monthly transfer from your checking account to an investment account. In addition, certain investment houses and fund families may facilitate periodic transfers. Good habits are best learned through repetition.
If your employer has a tax-deferred asset accumulation plan such as a 401 (k), you should try to maximize your contributions, especially when there is an employer matching component. If you are self-employed, consider the various tax-deferred savings vehicles you may be eligible to establish.
In addition to an investment plan, you should keep an “emergency fund” in savings or money market accounts. I often hear it said that an emergency fund should be three or six months of spending. I’m comfortable with the lower number as long as some of the non-urgent investments are allocated to high quality, highly liquid bond funds that have minimal market downside.
Although I recommend creating an automatic investment system, you should still create an asset allocation and periodically rebalance your investment portfolio to get back to that asset allocation. Rebalancing requires discipline because it involves selling asset classes that are doing well and buying asset classes that are not. There are many resources available for a more in-depth discussion of asset allocation and portfolio rebalancing.
Property and Casualty Insurance
Now is a good time to make an appointment with your insurance broker to assess and possibly update your coverage. In addition to considering the upper limits of your homeowners and auto coverage, you should consider whether deductibles make sense. I’ve seen many instances where the deductible, basically the first dollar self-insurance portion, is unnecessarily low and your insurance dollars can be better used to increase the upper limits of coverage or add an umbrella policy. . At the same time, discuss the specifics of your coverage, the endorsements available and how you can take steps to reduce your premiums (alarms, automatic water shut-offs, etc.).
For many, a resolution that seems to be delayed from year to year is to create or update your will (along with any ancillary estate documents). See Non-Tax Reasons to Review Your Estate Plan Now. During the estate planning process, you should discuss with your lawyer the appropriate title to your assets. It is important to have up-to-date estate documents and it is the responsible thing to do.
Everyone starts the year with resolutions that reflect the best intentions. But good intentions quickly fade unless you create a plan that leads to action; and only actions, not intentions, produce results. While my focus has been on financial resolutions for the new year, the larger context is financial literacy – a “resolution” that encompasses all other financial resolutions. May 2022 be the year you gain the level of financial literacy that will serve you and your family beyond January, beyond the year, and lead to a life of sound financial decisions. Good luck and best wishes for your financial success.
The author does not provide tax, legal, financial, or investment advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, financial, and investment advisers before committing to any transaction.