New Year’s isn’t just a time for revelry and midnight kissing; it’s also a landmark for new beginnings. Before the confetti from New Year’s Eve even gets swept up, folks around the world will be busy making promises to themselves and loved ones about how they plan to change their lives for the better in the coming months. That’s why the gym always seems so crowded in January, while the job market gets flooded with new applicants and fledgling teetotalers lock their liquor cabinets and hide the keys. New Year’s Resolutions aren’t limited to one’s physical health and career prospects, however. Financial well-being is a common theme as well, with people often pledging to finally pay off their debt and/or do a better job of budgeting.
With that in mind, we at WalletHub came up with 5 Resolutions for Your Finances in 2013. Committing to these changes – some of which might surprise you – will help improve your financial situation in the short-term and keep you out of trouble moving forward. Don’t worry if you’ve had problems adhering to resolutions in the past either; we’ve provided a roadmap of sorts to ensure that you don’t get lost along the path from resolution to end result. Good luck!
- Get out of debt: Despite reports that suggest we’ve paid down amounts owed in recent years, we are on course to end 2012 with close to $90 billion more credit card debt than we had at the beginning of 2009, according to the most recent WalletHub projections. In short, we’ve yet to cure ourselves of our debt obsession, and if we keep going this way we could help cause another recession in a few years. After all, habitual overleveraging inevitably reaches a tipping point where people can no longer afford the interest payments that are a result of skating by with minimum payments for too long.
- Create a budget – Solving your debt problems necessitates living within your means, thereby preventing your balances from growing and enabling you to focus on paying down what you already owe. To do that, you’ll likely have to rethink your definition of a necessity (hint: a flatscreen TV isn’t one). We recommend ranking your common monthly expenses in order of importance and eliminating those that you care least about until your expenses are significantly less than your monthly take-home.
- Adhere to the Island Approach – You can minimize interest and get the best possible collection of rates and rewards by isolating different types of expenses on individual credit cards, as if they are desert islands. For example, you should carry any debt you have on one card while using a different card to make everyday purchases (which you should always pay for in full within the respective billing period). If you’re charged interest on the card you’ve designated for everyday use, you’ll know that you need to cut back. You can use a credit card calculator to identify the best credit cards for each of your unique needs.
- Treat debt like an avalanche – If you have a few different balances, attribute the majority of your monthly debt payment to the balance with the highest interest rate while only putting the minimum required to stay current toward your other balances. As you systematically eliminate your most expensive debt, the money you have available for other balances and, eventually, pursuits such as saving for college and retirement will increase like an avalanche rolling down a hill.
- Build excellent credit: Roughly half of all consumers have excellent credit (i.e. credit scores above 719), and everyone else has ample incentive to see how the other half lives, so to speak. Credit card companies are currently offering hundreds of dollars in initial rewards bonuses and 0% introductory interest rates for more than a year to new customers who have excellent credit. Your credit standing also impacts your loan terms, job prospects, and ability to lease either a car or a place to live. In other words, excellent credit really pays off.Recommended Approach: Exactly how you approach credit building depends on your starting point. If you’re new to credit or trying to recover from past mistakes, opening a secured credit card is likely your best option. Anyone who can place a refundable security deposit of at least $200 can get a secured card because the deposit acts as the account’s spending limit and protects the issuer financially. Secured cards are also indistinguishable from “normal” credit cards on your credit reports, which means that as long as you make on-time payments each month, positive information will flow into your credit reports and you should see credit score gains in a little bit over a year. Those of you who have already built a bit of credit should certainly follow the same game plan in terms of making on-time payments, but you should also make sure to have 3-4 open credit/loan accounts and minimize debt in order to boost your available credit and expedite the credit building process.
- Improve your child’s financial literacy: The financial issues we encountered during the recession revealed what amounts to a financial illiteracy crisis. Most of us are ill-prepared to manage our finances responsibly and have little faith in our kids’ ability to do so either. More than 70% of parents say their kids don’t know the basics of money management, according to Visa’s 2012 Financial Literacy Barometer, and it’s time we change that if we want to save our children from the same type of financial hardship we’ve experienced lately.Recommended Approach: The best way to impart financial lessons is through practical experience. We recommend starting by giving your child his or her allowance on a prepaid card and requiring that they foot some of their own bills (e.g. trips to the movies to start). A prepaid card makes for a great starter financial product because parents can closely monitor their kids’ spending habits through online account management and kids can’t incur any debt or ruin their credit standing. After your child masters prepaid card use, we suggest increasing their responsibilities while decreasing the frequency with which you provide their allowance and gradually progressing from providing it in cash to using a checking account and, finally, a student credit card.
- Start an emergency fund (or contribute more): The importance of an emergency fund was readily apparent over the past few years, as people who had planned for the best and spread themselves thin financially were unable to bridge the gap when they lost their job or their portfolio soured. Now, as both the economy and our faith in it grows, it’s important that we don’t lose sight of this important lesson.Recommended Approach: Ideally, you want a cash reserve equal to about one-year’s salary. This will obviously take some time to build, which means you should attribute a certain amount of each month’s take home to building your fund until it reaches the requisite value. Interestingly, having a solid emergency fund should be a higher priority than paying off amounts owed. Think about it: If you focus on paying off your debt instead of building an emergency fund, unforeseen circumstances such as job loss will cause you to immediately start falling behind on all of your payments. You’ll therefore not only find yourself back where you started in terms of debt, but you’ll also incur significant credit score damage and have creditors ranging from your phone company to your landlord coming after you.
- Get healthier: You might at first find it odd that we included a resolution related to physical health on our list of financial goals. However, there is a strong correlation between physical health and fiscal fitness. When you’re in good physical condition, you’ll be more productive at work due to increased energy, your insurance costs will be lower, you’ll be less inclined to waste money on weight-loss tricks, and your long-term healthcare costs will be significantly lower. For example, a 10% weight loss could save you $2,200 to $5,300 over the course of your lifetime, according to the Centers for Disease Control and Prevention.Recommended Approach: Don’t look for any wisdom in this recommendation, as we have no more expertise in this area than any of you. So make sure your weight is proportional to your height, eat healthy and balanced meals, exercise regularly, and eliminate bad habits like smoking or excessive drinking.
There you have it: your roadmap to financial well-being in 2012. Set your goals, focus on remaining disciplined, and remind yourself of the proverbial pot of gold at the end of their rainbow. That way all that will be fatter this time next year are your pockets!