9 New Year’s Resolutions

9_resolutionsHave your personal finances been a bit of a challenge this past year? According to Finicity’s Financial Fitness Survey, you aren’t alone!

  • Nearly 90 percent of survey respondents are moderately to very concerned about their ability to meet future financial obligations for major items, such as education and retirement.
  • Seventy-three percent of respondents said their financial situation is about the same as (40 percent) or worse than (23 percent) when compared to the previous year.
  • Sixty-six percent stated their approach to financial management is either reactive or simply total avoidance.  Only a small 34 percent follow a plan of action.

Here are 9 suggestions that you may want to consider for this upcoming year.  Now is the time to get control of your finances, and take that first step down the path to financial fitness. Why not start this next year off on the right financial foot?

1. Spend less than you make.
Just like you can’t loose weight if you take in more calories than you burn… you can’t save money if you spend more than you bring in.  Spending less than you make on a consistent basis is the key to reaching financial fitness and financial stability.  You can’t increase your savings, make investments, reduce debt or even make wise spending decisions if you’re consistently overspending your income each month.  Forty nine percent of respondents, to the financial fitness survey, said they rarely, if ever, use a budget to manage household spending.  No wonder they have so many challenges with overspending, increasing debt and lack of savings.

Put together a spending plan and make it one that works for you and your family!

For a step-by-step process of how to make an effective spending plan, look in the book Money for Life and its companion piece the Money for Life Success Planner.  These books walk you through the process and explain the reason behind each step, in a way that anyone can understand.  If you’d rather go the paperless route, Mvelopes® will help you create an online spending plan (www.mvelopes.com).

2. Save more… at least 10% of your income.
Ever hear of the theory of paying yourself first?  That’s basically what this is.  If you make it a habit to pull out 10% for savings and investments for retirement, before you pay any other bills, you are actively working towards a better financial future for yourself.  This 10% can include your 401k account if you have one, but be sure you are maximizing that option!  It’s also wise to put an additional amount into savings after your 401k investment is made.  Put this money into a money market account, money market fund or CD if possible, so that you get a higher interest rate.  According to Finicity’s Financial Fitness Survey conducted this past fall, 48 percent of respondents saved nothing in the past 6 months and 31 percent saved less than 10 percent of their income.  Don’t be one of the statistics, take action today and start saving!

3. Calculate your net worth.
Do a reality check to ensure you are on the right track. Your net worth should be increasing each year, even if it is just by a small amount.  The exercise of calculating your net worth can be very valuable as well… people often discover accounts, investments, etc that they have forgotten about, or need to update.

If your net worth has decreased from the year before, take an honest candid look at where you can make adjustments to improve these numbers.  Consider accelerated debt reduction.  Consider increased savings.  Even consider cutting up every credit card you have if it means that you stop overspending and start saving.  Be proactive in your efforts to get financially fit!

4. Start an emergency fund.
If you don’t already have an emergency fund, start one today!  Your emergency fund should have a minimum of 3 months worth of expenses in it.  This is your emergency money for a job loss, emergency repair, unexpected emergency medical expense, etc.  Keep these funds in a money market account or other high interest, easily accessible account.  If ever you have the misfortune of an unexpected job loss, unexpected car repair, unexpected appliance problem… you will be far more prepared to weather the storm if you know you have a little breathing room on your finances, thanks to your emergency fund!  That peace of mind makes all the difference.

5. Reduce your debt.
Use the debt roll down principle to quickly reduce your debt. Make a list of all your debts and prioritize them in order of interest (highest to lowest) or in order of the number of payments till payoff (fewest payments at the top).  Once your first debt is paid off, roll that payment amount into the next debt on your list. Follow the same procedure when the second debt is paid off.  You will not only reduce the number of years you will have payments, but you will also save thousands in interest if you follow this principle until you are completely debt free.

6. Use credit cards for the benefits, not the penalties.
If you use a credit card, only do so when you know that you already have the funds set aside to pay the balance completely when the bill arrives.  Do not carry a balance on your card!  It wastes money and ends up costing you a fortune in interest and finance charges.  Thirty Eight percent of respondents to Finicity’s Financial Fitness Survey stated that they never pay off their balance, and 33% only do so part of the time.  Are those airline miles really worth it?  Not if you aren’t paying the card off every month!

7. Make sure you have adequate insurance.
We’re talking home, life, disability, health, property and even auto.  Not too many other things will matter if you have no fire insurance and your house burns down.  Thirty Five percent of respondents to Finicity’s Financial Fitness Survey stated that they either knew they had too little insurance or that they weren’t sure what their coverage was.  Make sure that you, and your family, are covered adequately!

8. Create or update your estate plan and/or your will.
Whether you are single, married, divorced, kids or no kids… you need to have the proper documents to make your wishes known.

  • Update your beneficiary info on your retirement accounts, insurance, etc.
  • Specify money that you want to give to charity through a trust or gift exclusion.
  • When preparing a will reference an addendum in the will where you list who will get your various assets and personal property.
  • Make sure all language is clear and as specific as possible so that your wishes can be carried out.

9. Manage your portfolio.
If you have any 401k accounts from former employers, be sure you roll them over into an account that you control. Consolidation can also make your retirement accounts easier to manage, however, in doing so make sure you don’t jeopardize the diversification.  Tools like Mvelopes can help you keep an eye on all your investment accounts from one spot, quickly and easily.

Take advantage of the New Year and get on the path to financial fitness!

By Steven B. Smith, President and CEO of Finicity, the developers of Mvelopes and author of Money for Life – Successful Money Management and Financial Fitness in Just 12 Weeks and the Money for Life Success Planner – A 12-Week Companion to Achieve Financial Fitness.

10 Questions to Check your Financial Health for the New Year

Check Your Financial Fitness

Check Your Financial Fitness

With the New Year upon us, millions of Americans are making resolutions to improve both their waste line and their bottom line.  If you’re looking to improve your financial fitness this year, it’s important to first understand how you’re already doing.  The following quiz, taken from my Money for Life Success Planner, will help you understand how you’re doing financially, and where you can improve.

  1. What percentage of your income do you save each month?
    1. 10 percent or more
    2. Less than 10 percent
    3. None
  2. How often do you use a monthly budget to track and plan your spending?
    1. Almost always
    2. Sometimes
    3. Never
  3. When you make a purchase using a credit card, how quickly do you usually pay off the entire balance?
    1. Immediately or before the end of the month
    2. Between one and three months
    3. I usually carry a balance from month to month
  4. How many times during the last six months have you paid a bill late?
    1. None
    2. One to five
    3. Six or more
  5. Most of your major purchases are…
    1. …planned in advance, with money set aside to cover them
    2. …planned even though the funds aren’t always there to pay for them
    3. …unplanned or spontaneous
  6. If you needed to come up with money quickly to pay for a major home repair or an emergency, what source would you use?
    1. Funds already on hand
    2. Funds from available credit
    3. No funds available without establishing credit
  7. If you lost your job or main source of income, how long could you provide for your basic needs and meet your financial obligations?
    1. Three or more months
    2. One to two months
    3. Less than one month
  8. The insurance I have to cover the loss of major assets including real estate, autos and personal property is…
    1. …enough to cover replacement costs
    2. …less than enough to cover replacement costs
    3. …unsure or don’t have coverage
  9. When was the last time you reviewed and adjusted your retirement plan?
    1. Within the last year
    2. In the last five years
    3. I don’t have any savings for retirement
  10. When you think about your ability to meet future financial obligations, you feel…
    1. …completely at ease
    2. …moderately concerned
    3. …very concerned

Give yourself five (5) points for each time you answered “1,” three (3) points for each “2,” and one (1) point for each “3,” then total your score.  If you scored between 40 and 50, you’re in great financial shape.  If you scored between 20 and 39, you are off to a good start, but could still address some weaker areas.  If you scored below 20, you need to rethink your financial plan, and make some big changes.

Regardless of how you scored, now is a great time to sit down and examine your financial situation.  Write down your financial goals, and develop a plan of how to accomplish each one.

Steven B. Smith is the author of Money for Life: Successful Money Management and Financial Fitness in Just 12 Weeks! and the Money for Life Success Planner and creator of the Mvelopes Money Management system.

[photo courtesy of flickr / CC BY-SA 2.0]

Three Financial Resolutions You Can’t Afford Not to Make This Year

New Year 2010

New Year 2010

And how to actually keep them

Every January, millions of Americans determine to shed a few pounds and to finally get their finances in order.  Unfortunately, most estimates indicate that less than 30 percent of those well-intentioned resolutions make it through the year.  The reason most resolutions fail is because a plan is never laid out to help achieve the goal.  If you are serious about finally getting your finances in order this year, here are the three resolutions you need to make, along with easy steps to help you actually keep them.

1.  Automate your finances.

Why it’s important: If it’s not easy, most of us will quit before the New Year is a month old.  The key to effectively managing your money is tracking where it’s going, and how much money you have allocated for specific categories.  Paper and pen will do the trick, but be honest with yourself, do you plan on keeping that paper and pen with you for the next year, logging each and every purchase no matter how large or small?  The Internet allows you to track all your accounts with no manual effort, and will even do all the math for you.  If it’s automatic, you won’t get lazy, and you won’t forget to do it either.

Managing your finances online may also help keep your money safe.  According to a 2005 study on identity theft by the Better Business Bureau and Javelin Strategy and Research, “electronic monitoring provides greater safety by sharply reducing time to detection, and potentially eliminates the paper records and mail that are possible avenues to many identity theft cases.”

How to keep your resolution: Set up a secure online budgeting system like Mvelopes®.  Mvelopes will automatically track your expenses from multiple accounts and credit cards as well as provide you with balances for various savings and spending categories.  Seeing where you are spending your money will let you know where you can cut back.  Seeing your net worth rise in the net worth tracking feature will keep you motivated.

Set up automatic transfers with your bank to pay your mortgage and other fixed payments to avoid missing a payment or incurring late fees.  Use online bill pay to save on envelopes, stamps, and time. Set up an automatic transfer to a savings or money market account once a month.  Find a high interest bearing account to maximize your savings.

2.  Stop paying interest and start earning it.

Why it’s important: According to Bankrate.com, if you charge $1,000 on your credit card, and pay only the minimum payment (assuming an interest rate of 15 percent and a 2.5 percent minimum payment), it will take over 10 years to pay off and cost an additional $757.98 in interest.  Conversely, if you were to take only the amount you would be paying in interest each month on that loan and invest it in an account earning ten percent, it would grow to $1,594.92 over that 10 years.

Even if you’ve gotten deep into credit card debt and can’t pay it off quickly, you can save a bundle by lowering your rate, and paying more than the minimum.  By dropping the interest rate on your credit card in the example above to 11 percent and paying only $30 a month, you could pay off that $1,000 in just over three years with only $198.85 in interest.

How to keep your resolution: Always pay at least the minimum payment on time, and if at all possible, pay your credit card balance in full each month.  Mvelopes has a credit card tracking feature that automatically sets aside the exact purchase amount each time a purchase is made on your credit card to help you pay off the balance in full each month.

If you are carrying a balance from month to month, cut your spending to a minimum and allocate all the extra money you can to paying off your debt.  Use the debt roll down principle to quickly reduce your debt.  Make a list of all your consumer debts and prioritize them in order of interest (highest to lowest).  Pay the minimum on all your debts and pay as much as you can on the one with the highest rate.  Once your first debt is paid off, roll that payment amount into the next debt on your list.

Call your credit card issuer and try to negotiate a lower rate.  If they decline, let them know you plan to roll your balance to another card and cancel the card with the higher rate.  If your credit history is clean, you should be able to find a card with a 0% introductory APR.  Don’t make any purchases on the new card as often the introductory period ends as soon as you make your first purchase.  Be careful the interest rate doesn’t skyrocket after the introductory period, and make sure you cancel the card with the higher rate to avoid simply running up a larger debt load.  Check www.creditcards.com to compare credit card offers.

Check your credit reports to make sure they’re accurate.  The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. You can order your reports online at www.annualcreditreport.com or by calling 1-877-322-8228.

3.  Stop procrastinating saving for your retirement.

Why it’s important: Time can be your biggest ally when investing for retirement.  For example, if you begin at age 25 and invest $4,000 annually in a portfolio that provides a 10 percent average annual return, then stop contributing after 10 years, your investment will grow to $1,365,818.31 by the time you retire at 65.  However, if you procrastinate investing until you are 35, then contribute $4,000 annually in a portfolio with the same 10 percent average annual return, and continue to contribute every year for 30 years until retiring at 65, your investment will only grow to $759,775.11.  Even though you contributed $80,000 more over the life of the investment in the second scenario, you still ended up with $600,000 less.

How to keep your resolution: Contribute at least enough to your 401(k) to get the maximum company match.  Talk to your HR department to find out the details of your company’s plan.  If your employer offers a company match and you are not contributing to your plan, you are essentially turning down a bonus every year.  And since your contributions are taken out on a pre-tax basis, as you increase your contribution, your taxable income decreases, meaning you pay less in taxes.

Open a Roth IRA.  Your money grows tax-deferred, and just so long as the IRA has been open 5 years or more and you are at least 59 ½ when you start to withdraw, there are no tax penalties for withdrawal.

Make sure that no more than five percent of your portfolio for either your 401(k) or your Roth IRA is in a single stock.  Diversifying is the best way to ensure maximum growth over time while minimizing the risk and volatility of the market.  Select an index fund or target fund for an easy option that requires little oversight.

From start to finish. Regardless of where you stand financially, the New Year provides an excellent opportunity to review your finances and make improvements.  Make sure that this year you don’t just start fresh, but that you also finish strong.

Steven B. Smith is the President and CEO of Finicity, the developers of Mvelopes and author of Money for Life: Successful Money Management and Financial Fitness in Just 12 Weeks!