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WalletHub’s 14 for ’14: Financial Resolutions for the New Year

by Odysseas Papadimitriou on December 17, 2013

WH 2014 ResolutionsWith the economy finally improving and Congress even getting its act together, it’s time for us as consumers to do our part.  And what better time than New Year’s to make some resolutions for financial improvement?  We devised a list of 14 of the most important personal finance improvements you can make in ’14, so check them out and get to work!

 

  1. Set Daily Goals & Devise an Incentive Plan

Resolutions, by their very nature, are goals, but they too often take the form of broad proclamations that lack both specificity and a plan for implementation.  So, rather than setting high-level, abstract goals, determine what daily habits you’ll need to change in order to gradually improve your financial situation and develop incentives that will prevent you from abandoning your quest prior to fulfillment.  After all, as Aristotle once said, “We are what we repeatedly do. Excellence, then, is not an act, but a habit."

But it's not just ancient philosophers who are touting this approach. Maurice Schweitzer, the Cecilia Yen Koo Professor of Operations and Information Management with the Wharton School of the University of Pennsylvania, says people must, "Set specific, concrete goals that are easy to visualize."

If, for example, your goal is to pay down debt in the New Year, Schweitzer says the solution can be as simple as bringing lunch to work rather than eating out. “Figure out a specific plan for when you will shop for groceries, what you will buy, when you will make your lunch, and where you will eat it,” he says, adding that, “Incentives, even self-set incentives, matter profoundly. For example, you can make a plan to go to your favorite burger place with your best friend once you have paid off your credit card debt.”

  1. Make a Budget

Only two in five adults maintain a budget and keep close track of their spending, according to the National Foundation for Credit Counseling, and that ratio has remained the same since 2007.  It’s therefore no surprise that U.S. consumers have racked up tens of billions of dollars in credit card debt since then.

“One of the most important things that we can do to help the average person become more financially literate is to teach people the importance of personal budgeting, says Steven J. Pilloff, assistant professor of finance in the School of Management at George Mason University. “This practice enables people to observe the implications of decisions, which has the potential to result in more prudent choices.”

Fortunately, the rise in online money management tools makes expense and payment tracking easier than ever.  Supplemental strategies, like the Island Approach or asking your credit card issuer to lower your spending limit to match your budget, are conducive to the adoption of sustainable spending and payment habits as well.  Ultimately, your budget should reflect your annual financial goals and effectively serve as a roadmap for achieving them.

  1. Find a Wallet Workmate 

Much like writing down your goals makes them more real from a psychological perspective, apprising another person of your financial improvement plans is a great way to foster stick-to-itiveness.  Not only are people far less inclined to deceive or disappoint others than they are themselves, but having a support system that you can leverage for tips and advice will also reduce the barriers to goal achievement.

“I’d encourage people to find a frugal friend, someone with whom they can talk about money and get support for their choices,” says Jennifer Romich, an associate professor with the University of Washington’s School of Social Work who studies economics and human development. “This is not an easy thing to do. We have been strongly encouraged to become consumers, and it can feel like a counter-cultural act to live within (or below) ones means.”

  1. Save at Least $300 on Monthly Bills

Show me a person who has no room to save on their monthly bills and I’ll show you a fool.  From cell phone contracts and premium cable packages to groceries and utility payments, we all have some budget fat than could stand to be cut.  So, put all of your accounts and habits on the table in the New Year, determine whether or not you are getting the best possible deals, and adjust accordingly.

Reevaluating how much you spend on your mortgage and car loan is a good place to start, according to Dan Ariely, the James B. Duke Professor of Psychology and Behavioral Economics in the Fuqua School of Business at Duke University.

“My guess is that most people can refinance their mortgage,” he told WalletHub in a recent interview. “People don’t seem to negotiate for mortgage rates even though they can and probably should. And, by the way, the same thing happens when people buy new cars. Often people negotiate for the price of the car and the price of the house, but they don’t negotiate for the price of the loan. But, in fact, the amount they could save by negotiating for loans for cars and homes is probably much more substantial than the amount they negotiate on the price itself.”

  1. Increase Savings by 10% Across Key Accounts

The Great Recession taught us a number of important lessons about strategic financial planning as well as the value of cash reserves.  Now is the time to apply what we’ve learned.  So, if you don’t have an emergency fund, a retirement fund AND a college fund for your kids, open them up and get to saving.

“There is fantastic research that came out of the University of Washington quite a few years ago, showing that people who had opened college savings accounts for their kids had kids that were more likely to go to college,” Ariely said. “The idea is that once you open an account for a particular goal, you start thinking about it. It becomes a goal that everyone agrees on and tries to achieve, and it becomes a galvanizing agenda for the family and therefore creates momentum moving forward. To the extent that a family can open savings accounts for particular goals, it is likely to be helpful.”

Your goal should be to end the year with 10% more money in each of these accounts, so make sure to factor that into your budget.  And while it may surprise many people, establishing an emergency fund is actually a higher priority than paying off debt because without cash reserves, you’ll only be an unexpected expense or income disruption away from ending up right back where you started, even if you manage to get out of debt in the short term.”

  1. Reduce Non-Mortgage Debt by 15%

Considering all the time and effort we put toward finding deals and maximizing investment returns, putting up with the corrosive effects of compounding interest doesn’t make too much sense.   The best approach to debt repayment is to attribute the majority of your allotted monthly debt budget to the balance with the highest interest rate, while making minimum payments across all other balances.  Once your most expensive debt is paid off, repeat the process with your next most costly balance.

Of course, changing course from steadily racking up debt to actually paying it down will be difficult. In order to do so, most of us will need to correct some bad habits as well as adjust our definition of a necessity.

"As consumers, we suffer from what I call short-term amnesia," James A. Roberts, a professor of marketing at Baylor University and author of Shiny Objects: Why We Spend Money We Don’t Have in Search of Happiness We Can’t Buy, recently told CardHub. "After teetering on the financial brink it should be reasonable to think that we will have learned our collective lessons. But this was far from what happened. Sure, we tightened our belts and used our credit cards less and saved a little bit more (but still at anemic levels) but only until the economic storm clouds showed the slightest signs of abating. A little economic sunshine and savings rates dropped below pre-recession levels and credit card debt has climbed as recent statistics show."

  1. Figure Out Health Insurance

We are currently in the midst of one of the most substantial changes to the health care market in decades, and it’s clear that many consumers don’t know which way is up in this new insurance environment.  So, whether you love or hate Obamacare, it’s important to put those feelings aside and determine what adjustments need to be made in the best interest of your family’s physical and financial wellbeing.  For example, high-deductible plans may require new savings objectives or Medicaid expansion may necessitate signing up for health insurance for the first time.  You might even consider moving if a neighboring state’s health care policies are far more favorable than where you currently reside.

And while the jury is still out in terms of the Affordable Care Act’s overall impact, the hope is that it will ultimately reduce costs for consumers as well as benefit the economy at large.

“With the passage of the most significant health care reform since Medicare, we can expect an impact on our national economic well-being (GDP, unemployment, debt) through health,” says Debra Sabatini Dwyer, chair of the Department of Healthcare Policy and Management at Stony Brook University. “So what should we expect for 2014: It’s hard to predict given the various Band-Aids that the 2,600 pages of reform represent on the current system. Everyone is watching to see if the mandate of coverage will indeed resolve the adverse selection problem. If it does, premiums will equilibrate downward and we should experience improvements in the economy (growth and stability). Employers will be free of the health insurance expense. It won’t be a big difference in 2014 while insurance companies keep a cushion against the adverse selection problem. The decline, if any, would happen later in the year.”

  1. Consider Hands-Off Investing

Investment management is a full-time job, and even the pros regularly make mistakes.  It’s therefore important to ask yourself if you have the time, inclination, and knowledge base to actively manage your own investment portfolio.  For the average person, the answer to those questions is likely to be no, which means a portfolio comprised of well-diversified ETFs and mutual funds is the way to go.  After all, only 24% of professional investors beat the market in the last decade.

“Most people should invest in low-cost index funds, either open-end mutual funds or ETFs,” says Terrance Odean, the Rudd Family Foundation Professor of Finance at the Haas School of Business at the University of California, Berkeley. “A good starting point might be an all market US equity fund, an International equity fund, and a well-diversified US bond fund. For long-horizon goals such as retirement, most people will want to allocate more to equities than bonds. However, as we've recently experienced, equity returns are usually more volatile than bond returns. So people who have already built up enough savings to meet their retirement needs, may want to scale back on risk.”

  1. Take the Pulse of Your Career

It’s easy to forget the big stuff as you focus on saving a dollar here, investing a dollar there, but there are few areas that affect your finances more than your choice of career and where you are employed.  Reevaluating where you stand professionally will enable you to get a sense of what other potential opportunities are out there, how competitive your compensation package is, and even whether your location may be holding you back.

“People who are uncertain of what they want to do for a career should look at finding a position that will provide transferable skills that will be beneficial in a variety of careers,” says Stacey Bales, an academic success specialist in the Fulton Schools of Engineering at Arizona State University. And Barbara Laporte, director of career services in the University of Minnesota’s School of Public Health, adds that, “Our advice keeps coming down to one main word: Network, network, network!”

Even if your efforts do not lead to a career change, you’ll gain some valuable peace of mind and will have some useful data to leverage the next time you negotiate your contract.

  1. Feed Your Financial Literacy

Financial literacy is much more than a buzzword.  Rather, it’s the key to responsible money management and preventing history from repeating itself as far as the Great Recession is concerned.  Not only is it important to instill in our children the value of a dollar and the importance of saving, but we must also give ourselves a regular refresher course in order to make sure that we practice what we preach and that our lessons actually hold water.  So, make it a practice to shore up financial knowledge gaps, and apply what you learn to your money management.  This is one investment that will surely pay off big time, as long as you make sure to focus on fundamental concepts and add details primarily an ad-hoc basis.

“Based on our studies, teaching people to plan / budget their money over the long-haul and take calculated investment risks seem to be more malleable and useful skills, rather than training them to learn and correctly answer objective questions about interest rates, bond prices, etc.,” Richard G. Netemeyer, the Ralph E. Beeton Professor of Free Enterprise and Senior Associate Dean of the McIntire School of Commerce at the University of Virginia, told CardHub.

“This latter type of knowledge can decay in memory over time rendering such knowledge as a limited predictor of engaging in wise financial behaviors. Thus, a potential approach is ‘just in time’ financial learning. That is, in easy-to-understand language and training, have those who are just about to buy a house learn the ins-and-outs of mortgage rates, closing costs etc. close to the actual purchase By conveying the relevant financial knowledge close to the specific financial decision, the probability of a better decision is made.”

  1. Get Some Exercise

The ties between physical, mental, and financial health are well established.  We know that people who exercise regularly are happier, more productive, and have better memory.  So, if your significant other telling you to put down the doughnut and get off the couch isn’t enough to spur you to action, consider your wallet wellness instead.

“Money problems are consistently rated as one of the biggest sources of stress in people’s lives,” says Arthur B. Markman, professor of psychology and marketing at the University of Texas at Austin and author of Smart Thinking and Smart Change. “People who do not have money problems are consistently happier than those who do. The more that people learn to budget and get in a pattern of saving so that they have a financial cushion in case of an emergency, the happier they will be throughout their lives. The value of financial literacy is the value of happiness.”

  1. Replace an Hour of Pure Entertainment with Growth Entertainment Every Day

Successful people all share a number of important traits, two of which are the constant pursuit of self-improvement and the maximization of down time.  Considering that the average American watches nearly five hours of television each day, according to Nielson, it shouldn’t be that difficult to replace one hour in front of the boob tube with an hour reading a book, learning a new skill, or otherwise improving yourself as both a person and a professional.

  1. Don’t Forget to Give Back

Being charitable is all about putting yourself in the shoes of those who are less fortunate.  It shouldn’t be too difficult to do so these days, considering the struggles so many of us have endured throughout the housing market collapse, ensuing recession, and painstaking economic recovery.  Not only will giving back help you make a real difference in someone’s life, but it will also make you realize how many luxuries we take for granted.

Just make sure to properly vet a given organization prior to donating any money. There are, unfortunately, far too many charities that either divert too much money to administrative costs at the expense of their stated mission or engage in outright fraud.

“It is not easy to find the best charities,” says Kenneth Stern, former CEO of National Public Radio and Author of With Charity For All: Why Charities are Failing and a Better Way to Give. “The usual measures of charities such as administrative ratios and the like are not reliable indicators of charitable effectiveness. They will tell you where they spend their money but not whether their spending has an impact. It’s best to research the individual charity, see whether they set appropriate and meaningful goals, and whether they report out to the public how well they are doing against these goals.”

  1. Stress Test Your Finances

As Benjamin Franklin once said, “By failing to prepare, you are preparing to fail.”  That sentiment is perfectly applicable to personal finance and should serve as the impetus for making sure that your household finances are ready for whatever comes your wallet’s way.  One way to verify that you’ve dotted all of your I’s and crossed all of your T’s is to run a few War Games-esque simulations designed to mimic major life disturbances, such as job loss, disability or even the death of your family’s breadwinner.  Such exercises may remind you about the importance of life insurance, disability insurance, sufficient health care coverage, financial reserves, and various other financial vulnerabilities that you’d rather find out about ahead of time.

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