My inner math nerd loves the new year. On New Year’s Eve when everybody else is out blowing big bucks at the bar, I’m at home setting my financial goals for the next 12 months. Sounds boring, I know but I’ve learned how important it is to have a plan in place for my dollars and cents.
If you spent most of 2016 dealing with debt or living paycheck to paycheck, you may be looking forward to the fresh start that a new year brings. You may even be writing up some financial resolutions to get your bottom line in shape. While that’s a step in the right direction, there are some resolutions that could be worth breaking.
Resolution #1: Stop using credit
Swearing off credit cards for good may seem like a smart move but it can backfire if you’re not careful. The reason? Your credit score.
Thirty-five percent of your FICO credit score is based on your payment history. If you stop using credit cards cold turkey and you don’t have any other loans, you don’t have any opportunity to continue building a positive payment history. While that won’t necessarily hurt your score, it does nothing to help it either.
What can hurt your score is closing down your credit card accounts altogether. Besides payment history, your credit utilization and the average age of your credit accounts both impact your score. When you close accounts that shrinks your available credit. It can also affect the age of your credit history, if the accounts have been open for awhile.
If you’re determined to avoid racking up new credit card debt in the new year, a better resolution is to only charge what you can afford to pay in full each month. Choose a card that has a low annual fee or none at all and keep an eye on the regular annual percentage rate for purchases in case you do end up having to carry a balance one month.
Resolution #2: Pay off all your debt before saving for retirement
Paying off debt is important to your long-term financial health. When a big chunk of your income is going towards student loans, credit cards or car loans, it can be tough to gain any traction when it comes to saving and investing. Thinking you have to wait to save for the future until all your debt is gone, however, could be a big mistake.
The longer you put off saving for retirement, the less time you have to take advantage of compound interest. Saving a smaller amount sooner rather than later can keep you from having to play a major game of catch-up down the line. Reducing your debt payments by $50 or $100 a month may increase your payoff time slightly but it could make a big difference to the size of your nest egg.
For example, if you were to save $50 a month in a Roth IRA from age 35 to 65, you’d have over $60,000 tucked away for retirement. That’s assuming a seven percent annual rate of return. If you were to step that up to $100, your savings would grow to more than $121,000. Being gung ho about ditching your debt is great but it’s important to strike a balance so that your other goals don’t end up getting left in the dust.
Resolution #3: Spend less money
There’s nothing wrong with adopting a frugal mindset. That’s what allows me to live on roughly a third of my income and neither I, nor my kids, feel deprived in the least. There’s a difference, however, between being frugal and cheap.
Frugality means making a conscious choice about how you spend your money. Being cheap means trying to get away with spending as little as possible. The downside of the cheapskate approach is that it can actually end up costing you money in the long run.
For example, let’s say you’re feeling under the weather but you don’t want to shell out money for a doctor’s office visit so you try to nurse yourself back to health at home. A few days go by and now your symptoms are getting worse. It’s the weekend and your doctor’s office is closed so you end up taking an unexpected (and expensive) trip to the ER.
This isn’t the only scenario in which being cheap can come back to haunt you. Going low-budget on home repairs, buying an off-brand computer or opting for used tires when your car really needs new ones are all examples of times when trying to save a few bucks can prove to be a wasted effort. After all, you get what you pay for and sometimes you’re better off biting the bullet and paying more for better quality versus being a penny-pincher.
Resolution #4: Put your finances on autopilot
Don’t get me wrong, there’s a lot to like about automating your finances. Scheduling up automatic withdrawals for your bill payments or automatic transfers to your savings account means less stress in the long run. There is a drawback, however, if it causes you to lose touch with your money completely.
Take your 401(k), for example. You may think that chipping in 10 percent of your salary each payday is enough to give you a comfortable retirement but you could be wrong. If you’re just saving that money without considering what your target retirement number is or how much of your earnings are getting eaten up by fees, you could be in for a nasty surprise once you’re ready to stop working.
While you don’t have to jump off the automation train completely, you shouldn’t let yourself take a completely hands-off approach to your money either. Scheduling regular check-ins with yourself to see if any of your bills have crept up or whether you’re on track with your savings rate is a must for keeping a your financial future looking bright for 2017 and beyond.
Tell us your resolutions for a new, financial year!
