When deciding on your New Year's resolutions for 2016, don't forget about your personal finances. From improving your credit score to paying down your debts, there are several things you can do to take control of your wallet and set yourself up for the future. With that in mind, here are five suggestions from our personal finance experts that could help you make that happen.
Matt Frankel: One way to improve your financial well-being in 2016 is to work on maximizing your credit score, and the best way to do that is to understand how credit scoring works.
The FICO score, which is by far the most widely used scoring model, is made up of five categories of information:
- Payment history (35% of your score) -- This is the most important part and the simplest. Just pay your bills on time every month, and you'll maximize this part of your credit score.
- Amounts owed (30%) -- This refers mainly to the amounts you owe relative to your credit limits or original loan balances, as opposed to the actual dollar amounts you owe. So, to maximize this part of your score you can either pay down your debts more aggressively, increase the amount of unused available credit you have, or a combination of the two.
- Length of credit history (15%) -- By keeping your existing accounts open and limiting your applications for new credit, you can boost this category, which takes into account your oldest account, average account age, and the age of your individual credit accounts.
- New credit (10%) -- This considers the number of new credit accounts you've opened, as well as any credit inquiries made over the past year. As time goes on and your existing credit inquiries get older, this category can experience an improvement.
- Types of credit used (10%) -- Essentially, having a healthy mix of credit accounts tells creditors that you can handle all types of debt responsibly. So, if you have a mortgage but no credit cards, it can actually count against you. For this reason, I recommend that most people should have at least one active credit card account, even if it's rarely used.
Having a better credit score can save you thousands of dollars in interest over your lifetime, so it's definitely worth the effort.
Dan Caplinger: One thing you can do to make your financial life a lot easier in 2016 is to start planning for the coming tax season sooner rather than later. Many people don't even think about their taxes until after the year is over, and that leaves you unable to use many of the strategies that can dramatically reduce your tax bill. Tactics like increasing charitable giving, taking advantage of various deductions and credits, and deferring income beyond the end of the year are only available if you take action during December rather than waiting until January -- or April.
Once 2016 starts, you should also look at staying on top of your taxes for filing your 2015 returns and even making early plans for dealing with your 2016 tax planning. Doing things like adjusting your withholding to better account for your actual tax liability can help put more money in your pocket every paycheck while also avoiding interest and penalties for not having enough money withheld from your pay. Boosting your retirement savings either through automatic contributions to a workplace 401(k) plan or to an individual IRA can also improve your tax picture. The sooner you start thinking about your taxes, the more you'll be able to take steps to reduce your overall tax bill.
Brian Stoffel: Over the past year, my wife, daughter and I have had to significantly pare down our material possessions as we've moved homes. The clutter in our life just became too much to move around.
I believe one of the most important tasks -- financially, mentally, and emotionally -- for any adult is finding out where your own level of "enough" is. I define that as the point where each additional good or service you buy only brings minimal improvements in your experience of life.
Unintentionally, we've been going through that process as a family, and I suggest you do the same in 2016. A few key things we've learned:
- We have far too much stuff -- books, blankets, knick-knacks, you name it. We'll get a nice write-off for donating these things to Goodwill, but we've also reduced our spending has decreased as we can now identify the "stuff" in the store before buying it.
- Even if there's something we do want to buy, we've agreed that for every item brought into the house, a similar-sized item must be donated to Goodwill -- making us think long and hard about our choices.
- We'll be moving into a relatively smaller space now, which will save us thousands of dollars over the years in payments.
- As our spending has pared down, the amount of money we need annually has shrunk. Not only does this help grow our savings, but it lowers the amount of money we'd need to retire.
Of course, everyone's level of enough will be different. But 2016 would be a great time to find out what yours is.
Selena Maranjian: A terrific way to become better off financially in 2016 is to pay off your high-interest rate debt -- or at least pay it down. That can seem a tall order, especially if you owe tens of thousands of dollars, but it can be done. Some folks on our discussion boards have explained how they paid off more than $100,000 in debt!
Getting out of debt is critical because it's hard and often impossible to become financially healthier while carrying expensive debt. Most of us need to sock away a lot of money in retirement accounts, but if you're doing so while carrying debt that's costing you, say, 25% annually, then you're unlikely to get ahead. The stock market has averaged annual gains of close to 10% over long periods. If your money is growing by 10% each year but you're paying 25% on debt -- or letting your debt grow by 20% or more each year, then you're not likely to get much healthier financially.
Carrying high-interest rate debt (I'm not referring to reasonable mortgage interest rates of a few percentage points) is kind of like reverse investing. Your debt can grow huge if it's not paid off quickly -- making the lender, not you, rich. Some aggressive ways to pay off debt include getting a second job for a while, selling a second car, taking in a boarder, and cutting out some big-ticket expenses, such as cable TV.
Jason Hall: The money- and effort-saving things my colleagues write about are excellent, but at some point, there's only so much more you can do to cut costs or save. If that's your situation, it may be time to put yourself in a better position to make more money.
Depending on your current profession, there could be certifications or degrees that would increase your earnings. If that's the case, then there's no better time than now to get enrolled in the classes or program you need to start climbing the ladder.
If you're in a dead-end job, it may be time to start training for a new career. There are plenty of resources to help you identify a high-demand, good-paying new job that's a good fit. A great place to go -- besides the Internet, of course -- is your local college or technical school. Not only will these institutions have great information about the programs they offer, but they'll typically also know what's in demand where you live.
It can be scary to take these steps, but if you really want a better financial life, making yourself better qualified for a better career could be the best move.
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