PERSONAL FINANCE: Financial Resolutions That Really Work – Part 2
In last week’s column, I discussed your New Year’s financial resolutions by recommending that you first set goals, organize yourself, and prepare a budget. Today I’m going to add specific actions that you can implement right now.
It is often said that the best way to reduce debt is to cut up your credit cards. I find this strategy extreme and a poor substitute for discipline and smart decisions. Dealing with debt is complicated, and many people fail to comply with debt-related solutions simply because they don’t know where to start or they don’t consider the bigger role debt plays in our financial lives. Debt isn’t necessarily bad. The debt allowed me personally to get through school, buy a house I could never have afforded with cash, and take vacation with credit card miles. But uncontrolled debt can be a bear holding us back from reaching our broader financial goals.
Most debts fall into one of two categories: installment debt and revolving debt. Installment loans generally include mortgages, auto loans, and student loans, which usually have fixed interest rates and fixed monthly payments. You can keep your installment debt under control by simply making your required monthly payments on time, which will also help build your credit.
Examples of revolving debt are credit cards and home equity lines of credit (HELOC). In general, it is better to pay off revolving debts first. It seldom makes sense to take out relatively low-interest installment debts (e.g.
If you haven’t already, consider refinancing your mortgage and student debt. Although current interest rates can rise from their lows, they are still cheap compared to historical interest rates. When refinancing your mortgage, watch out for “teaser” interest rates that will reset after a short time. I advise against a floating rate that will reset in less than five or seven years and encourage you to see the terms and conditions for the rate adjustment. However, depending on your future plans, a long-term fixed-rate mortgage may not be the best choice either. There are price calculators available online that can help you calculate the numbers.
Over half of all Americans have credit cards with them; It is not surprising that paying by credit cards is the number one financial resolution for the New Year. Doing this is a “twofer” as improving creditworthiness is also a common solution. If you have high-interest credit card balances with you, consider a powerful debt management tool often referred to as a “credit transfer credit card.” You will need to do some research and comparing online, but the short explanation is that you can open a new card and transfer your existing balance (within a time limit) either for free or for a reasonable price. Such cards offer a very attractive feature: they are interest-free for a certain period of time. During this interest-free payment period, any payments you make will be used to reduce the main balance on the card. Even during this grace period, you should pay at least as much as 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 things, immediately reimburses five percent for online purchases from Amazon Prime.
One final word on creditworthiness, if checking your creditworthiness 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 get it repaired if necessary. My preferred online source is annualcreditreport.com, which will provide you with a free copy of your credit history. The better your credit rating, the easier it is to get a loan on more favorable terms.
The second most common New Year’s resolution after paying off credit card debt is to save and invest. Whether you’re looking to build a nest egg to buy a first home, fund your children’s education, or put away money for your retirement, having clear goals, like most habits, is key to your success.
For many, the most proven way to amass wealth is to develop a set-it-and-forget-it method of hiding money. Does your employer offer an automatic wage deduction plan? If not, you should consider making a monthly systematic transfer from your checking account to an investment account. In addition, some investment houses and fund families may allow regular transfers. Good habits are best achieved through repetition.
If your employer has a tax deferred asset creation plan like 401 (k), you should try to maximize your contributions – even more so if there is an employer adjustment component. If you are self-employed, take a look at the different tax deferred savings models you can potentially start.
In addition to an investment plan, you should have an “emergency fund” in savings or money market accounts. I often hear that an emergency fund should be the equivalent of three or six months of spending. I’m happy with the lower number, provided that some of the non-emergency investments are allocated to high quality, highly liquid bond funds with minimal market losses.
While I recommend creating an auto investing system, you still need to create an asset allocation and regularly realign your investment portfolio with that asset allocation. The realignment requires discipline as 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 schedule an appointment with your insurance broker to evaluate and possibly upgrade your insurance coverage. In addition to weighing the home ownership limits and vehicle coverage, you should discuss whether the deductible makes sense. I’ve seen many cases where the deductible, essentially the auto insurance portion for the first dollar, is unnecessarily low and your sum insured could be better used to increase coverage caps or add an umbrella policy. At the same time, discuss the specifics of your insurance coverage, the passengers available and how you can take steps to lower your premiums (alarms, automatic water shut-off devices, etc.).
For many, a resolution that seems to carry over from year to year is to make or update your will (along with ancillary estate documents). Take a look at the non-tax reasons to reconsider your estate plan now. During estate planning, you should discuss the proper naming of your assets with your attorney. It is important to have up-to-date estate documents and that is the responsible thing.
Everyone starts the year with resolutions that reflect the best of intentions. But good intentions fade quickly unless you create a plan that leads to action; and only actions, not intentions, produce results. While my focus was on financial resolutions for the new year, the broader context is financial literacy – a “resolution” that encompasses all other financial resolutions. Let 2022 be the year you build the level of financial literacy that will serve you and your family beyond January, beyond the year, leading to lifelong wise 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 advisor prior to entering into any transaction.