Whether you are a homeowner or a renter, a young person fresh out of college or an older worker dreaming of retirement, the start of a new year is one of the best times to get your financial house in order. You can grab pencil and paper, download financial software like Quicken or upload your financial information to a safe website such as Mint.com, but no matter which way appeals to you most you should take a few minutes to prepare for your financial future.
Be Specific and Realistic
While many people make general resolutions to lose weight or save more money each year, the people who successfully achieve their objectives are those who are specific. On the financial side, most people’s goals fall into one of three categories:
• Save more
• Spend less
• Pay off debt
The best way to accomplish any or all of these aspirations is to set a detailed goal and establish a date to achieve it. For example, instead of saying you want to save more money in 2013, decide how much you can realistically save each month and track your savings at the end of each month to see how you are doing.
Your financial goals will be different from your neighbor’s since everyone has a unique situation when it comes to money. In general though, you need to set your priorities in a logical fashion and make sure you and your family are adequately prepared for an unexpected event before you begin saving for your dream vacation.
• Emergency fund. The first step for everyone should be to save three to six months’ of essential expenses in an emergency fund. The amount you need to save depends on your circumstances. For example, if you and your partner or spouse both work and have stable employment, you might be able to live with a little bit less in the bank than someone in a one-income family with children. Keep your emergency fund in a bank account that’s easily accessible rather than in stocks or something that would have to be sold if you needed the money.
• Insurance. An annual insurance check-up is always a good idea, either on your own or with a trusted insurance agent. Make sure you have renter’s or homeowner’s insurance to protect your possessions from a fire or theft; adequate car insurance, life insurance if you have dependents, health insurance, disability insurance and long term care insurance depending on your age.
• Pay off credit card debt. If you carry a balance on one or more credit cards, you are likely paying a relatively high interest rate on that debt. Financial experts offer a variety of solutions to reducing or eliminating credit card debt. One of the most popular is Dave Ramsey’s “Snowball Plan”, in which you pay off your credit card with the lowest balance as fast as you can, then add those payments to the next credit card until all your balances have been paid in full.
• Protect your credit score. Your credit history has a huge influence on your ability to borrow money for a car or a home or college tuition. Check your credit report every year at www.annualcreditreport.com for free and pay a little extra to get your scores, too. Pay your bills on time, keep your credit card balances to less than 25 percent of the limit and don’t take on too much debt to keep your credit score high.
• Save for college. If you have children, no matter how young they are, it’s a good idea to establish a savings plan for college tuition. In Maryland, you can find out about “529” College Savings plans at www.CollegeSavingsMD.org. There are multiple options for parents to save up to $2,500 per child in a tax-deferred account. Future withdrawals are protected from federal income tax as long as they are used for higher education expenses.
• Save for retirement. Financial experts say that saving for retirement should start as soon as you’re employed in order to have plenty of time for your investments to mature. If your employer offers a 401k plan you should participate at the highest level you can afford and definitely, if your employer offers matching contributions, try to reach the match level since that’s free money.
• Pay down your mortgage. If you have reduced your credit card debt and are adequately saving for retirement or college tuition, you can also look into ways to reduce your mortgage balance faster. Many lenders allow you to make bi-weekly mortgage payments that result in your making an extra payment each year. For example, if you have a $200,000 30-year fixed-rate loan at 4.00 percent, your monthly principal and interest payment is $955. If you switch to bi-weekly payments, you’ll make 26 payments every two weeks of $477.50 and pay off your mortgage four years faster. You’ll also save $21,473 in interest payments over the life of the loan.
You can also simply add extra money to your monthly payment and designate that to reduce your principal balance. A good calculator to help you estimate your savings can be found on HSH.com.
No matter what your current financial status is, you can always use an annual check-up to tweak your financial plans and re-establish your goals.
Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance and business. Her clients include Bankrate.com, Insurance.com, HSH.com, The Washington Times, Urban Land Magazine, NAREIT's Real Estate Portfolio, and numerous Realtor association publications. Michele's first book, "HOMEBUYING: Tough Times, First Time, Any Time" is available now at Amazon.com or from www.MicheleLerner.com