If you’re like many Americans, you made a few New Year’s resolutions recently. And, like vowing to eat right and exercise more, financially motivated pledges bring the promise of a better and healthier life. But while making resolutions is admirable, it’s obviously more beneficial to actually keep them.
With this in mind, here are five classic financial New Year’s resolutions, along with expert advice on how to successfully achieve them:
1. Pay off debts. This is a bold resolution because debt often emerges as the “elephant in the room” that no one wants to confront. It will never go away, however, until you tackle it head-on. The beginning of a new year is a perfect time to get started.
Let’s begin with your credit cards to reduce or even eliminate that monthly, double-digit percentage interest rate burden. A quick consolidation can work wonders by transferring balances onto a new credit card with a lower rate. “Be careful here, as transfer fees could cancel out the savings,” says Sean Fox, co-president of Freedom Debt Relief. “And keep in mind that when the special, introductory rate expires, the interest expense will rise.”
Next, determine how much you can afford to devote every month to paying off your card and make sure the total exceeds the minimum requirement (and hopefully exceeds it by a substantial margin). Then, see if you can get some relief from credit card and other debt via the following options:
Negotiate with creditors, as some will agree to less onerous payment plans or debt reductions, especially if you demonstrate a hardship. “Ask about any new interest charged,” Fox says, “and include this in your evaluation of the proposed plan.”
Consolidate debt into a personal loan, which usually comes with a lower rate than credit cards.
Connect with a debt relief service. But be aware that a number of advertised “Get Rid of Debt Forever!” companies aren’t above board. To find a reputable provider, Fox recommends the American Fair Credit Council (AFCC).
(For more advice about reducing debt, read Get Out of Debt and Into Financial Freedom.)
2. Stick with a set budget. If you sat down and worked out a lean but reasonable budget before the New Year, that’s wonderful. But budgets are like diets—sometimes we can stick with them, and sometimes we can’t. To ensure success, open up a second checking account without a debit card or checks attached to it so it can only be used for digital transfers, and arrange to have your paycheck directly deposited into it. “In doing this, you make it more difficult to spend the money,” says Michelle Waymire, a financial advisor with Nalls Sherbakoff Group.
Next, tally up all monthly expenses. For those that come up once a year (like an annual Amazon Prime membership) or twice (car insurance), calculate them into a monthly payment (by dividing the Amazon Prime fee by 12, for example, and the car insurance bill by six). Add everything together to get your total monthly expense and seek to reduce non-essential costs so the monthly expenses are at a level that still allows for savings and an “allowance” of sorts, Waymire says.
“Then automate the plan, with regular transfers from your direct deposit account to your savings account and to your checking account for that allowance,” Waymire says. “This system eliminates the constant totaling of every expense, and you know how much cash you’ll have for spending money for whatever else you’ll need, or want.”
(For more advice about smart—and stress-free—budgeting, read 6 Simple Steps to Build a Stress-free Budget.)
3. Build an emergency fund. If you are following what the experts typically advise, you pledged in January to set aside no less than 3 months—and, if possible, six months—of living expenses in case of a job loss or other unexpected circumstances that would significantly impact your earnings and/or budget.
For starters, you have to figure out how much you spend every month. (See above for specifics on that.) Then, set a realistic “due date” for this goal, whether for three or six months of expenses. “With a due date, you can calculate how much you need to set aside with every paycheck to make your deadline,” Waymire says. “Next, open up a savings account for your emergency fund—and name it! That will force you to be more judicious about dipping into it for non-emergencies.”
(For reasons why you should build an emergency fund, read 9 Reasons You Need an Emergency Fund.)
4. Pay bills on time. The first step is to open them up as soon as they arrive. “People will allow them to stack up, afraid to look at them because of the ‘bad news’ they bring,” Fox says. “But this only makes the situation worse as they pile up, creating the potential for late payment penalties.”
Again, automation greatly helps here, as online bill payments on a regular, monthly date eliminate the chances of late fees. “Some lenders and even utilities offer financial benefits for use of their automated services,” Fox says.
5. Fund retirement accounts. Fox suggests a “Save Before You See It” plan, meaning you arrange for automatic deductions from your paycheck—such as 1% of your income if you receive a 2% raise—before the raise kicks in. “This is easy, because many employers offer direct deposit into retirement accounts,” he says.
Clearly, you want to put in as much as your employer will match—if you don’t, you’re leaving “free money” on the table. If you’re attempting to whittle down debt at the same time, it doesn’t have to be an “either/or” situation. You may, for instance, consider taking up a side or summer job to boost cash flow.
“With the summer break, educators have this option,” Fox says. “They can take an interesting retail job, tutor, teach English as a second language or even drive for Uber or Lyft.”