One of the most popular New Years' resolutions people make year after year is to do a better job of saving money and managing their finances. If you're among the millions of Americans who want to make smarter money decisions this year, then here are three to get you started.
If you have credit card debt, one of the smartest things you can do in 2016 is pay it down -- aggressively. In fact, it doesn't make sense to invest a dime of your money in the stock market if you have high-interest credit card debt. Here's why.
Let's say you have $5,000 in credit card debt at 16% interest, which means you're paying $800 in interest per year just to maintain that debt. Even if you're an excellent investor, you can't realistically expect to earn much more than, say, 12% annual returns on a consistent basis. So if you invest $5,000, you can reasonably hope to earn a $600 return the first year. This means that by investing $5,000 instead of paying off your credit card debt, you're actually losing $200 per year -- and that's if your investments are doing well.
If you have credit card debt, you can save tons of money by making and sticking to a plan to pay it down fast. In our previous example of a $5,000 credit card debt, if you chose to tighten your budget and pay $500 per month, then you'd have it paid off within 11 months and pay only $400 in interest altogether. If, on the other hand, you chose to pay just $100 per month, it would take you seven years, and you'd pay about $3,300 in interest.
Changing your spending habits and getting your credit card debt under control could be the smartest financial move you'll ever make.
Another powerful money move you can make in 2016 is to make smart choices regarding your health insurance. For example, you might be signed up for a top-notch plan that pays for most of the expenses you'll encounter (a "gold" plan, in Obamacare parlance). That makes sense for folks who have (or probably will have) significant medical expenses. But if you're healthy and don't need medical attention often, then you might opt for a less fancy plan (perhaps a "silver" or "bronze" one) and pay a lot less each month for your coverage. Likewise, if you have some medical issues and are a heavy user, then a more expensive plan might save you a lot of money in the long run.
Remember that Obamacare has helped cover critical preventive care at no cost to the patient. That means no matter what plan you're on, your annual wellness visit with your doctor, as well as routine checks like mammograms and colonoscopies, won't cost you anything. Many different plans will actually cover the same medical services and treatments -- they'll just vary in how the expense is shared between the insurer and the insured. If you're a light user, then you can save a lot of money by buying a less expensive plan. Be sure to consider HMO plans, too, which can cost less than PPO plans. If you rarely see any doctors, an HMO might serve you well, and even if you're a frequent user, your local HMO might offer some great doctors.
If you don't expect to rack up many healthcare expenses, a high-deductible plan can be especially attractive, as it will cost less than many alternatives. Better still, being on a high-deductible plan means you can open a Health Savings Account (HSA), funding it with pre-tax dollars that you can spend on qualified health expenses. Here's the cool thing about it, though: The money can stay in the account and can be invested and grow -- and whatever hasn't been spent by the time you reach 65 can be withdrawn for non-health-related expenses. In other words, it's similar to a tax-advantaged retirement account.
A lot of people wait until the last possible minute to make contributions to retirement accounts, but there's no requirement that you do so. You have more than 15 months in which you can make IRA contributions for a given tax year, starting on Jan. 1 and running until the tax-filing deadline for that year. Because of holidays, that gives you until April 18, 2016 to make contributions for the 2015 tax year.
It's smart to contribute to a retirement account whenever you can afford it, but the earlier you contribute, the longer your money can work for you. Given the fact that the stock market has gone up on average over the long run, money you deposit in an IRA or other retirement account in early January has an extra year or more to generate investment returns for you compared to money you deposit at the last possible moment.
By all means, if you haven't yet made an IRA contribution for the 2015 tax year, make that your top priority. But also start thinking about making 2016 contributions as well. The sooner you get money into your retirement accounts, the further ahead of the game you'll be with your retirement savings.
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