Last year, close to 40% of Americans made financial New Year's resolutions, according to a Fidelity survey. Studies show that those who make resolutions are more likely to accomplish their goals than those who don't, so now's a great time to come up with a few resolutions of your own.
Not sure where to start? Here are five financial resolutions for 2018 that will help you get your financial life totally under control in the New Year.
1. Resolve to finally get your financial life organized
Have you ever missed a payment because you forgot when it was due, or lost an important receipt you needed for a tax deduction? Being disorganized can cost you money and time. This year, take care of these tasks to master your financial life:
- Automate spending and saving: You can automate almost every aspect of your financial life. You can set up automatic bill pay for credit cards, loans, and utilities to avoid late fees due to accidental missed payments; you can set up automatic contributions to a 401(k) or IRA to save for retirement; and you can set up automatic transfers to savings to fund an emergency fund or other goals.
To set up automatic transfers to a 401(k), talk to HR or payroll at work and let them know how much you'd like to have deducted from your paycheck and diverted to your 401(k). The bank or the brokerage firm you use to invest in should also allow you to set up automatic transfers so money can come directly out of your checking account on payday and move effortlessly where it needs to go. Call your bank if you aren't sure how to set this up.
- Find mobile apps or computer programs that work: Technology has made money management easy. Apps such as Credit Karma and Credit Sesame will allow you to track your credit score over time and will send you alerts when changes occur, like new accounts opening. These apps can help you monitor changes in your credit and look out for identity theft. Mint is another great app that allows you to track all your accounts and your budget; you can use it to monitor your spending and debt and see how your net worth changes over time. And apps like Acorn will automatically transfer money to a savings account for you; you just link your credit and debit cards, and when you make a purchase, it rounds the total up to the nearest dollar and invests your change.
- Get your paperwork under control: If you have a mountain of paperwork, toss out old statements and digitize new ones. Utility and credit card bills more than a year old can be ditched, as can tax-related papers that are at least seven years old. Then switch to paperless statements and save PDF copies of tax returns going forward.
2. Resolve to get your money into the right accounts
When was the last time you changed your credit card or your bank? Have you checked your investment accounts lately to find out about commission costs? Far too many people stick with the status quo when it comes to their accounts, even if there are better options. Here are some ways to make your money is in the right place:
- Decide what to do about old 401(k)s: Do you have 401(k) accounts from past employers that you haven't decided what to do with? Evaluate your options, including rolling the accounts over into a new 401(k) or IRA. If you like the investment options in your current account, you can leave the money where it is -- but make sure you've compared your options, and don't leave cash parked in an old 401(k) solely out of convenience.
- Ask your credit card provider to waive or lower annual fees: According to a 2017 survey by CreditCards.com, eight in 10 cardholders were able to get their annual fees waived or reduced simply by calling their creditors. It doesn't hurt to make a phone call and try to lower your costs.
- Make sure you're using the right accounts: Make a list of accounts where you keep your money and check how they compare to competitors. You may be able to switch to a high-yield savings account to earn more interest, a discount brokerage to save on investment costs, or a credit card that provides rewards that better match your spending. If there's a better deal out there, make the change.
3. Resolve to become debt-free
The average debt per indebted household in the U.S. is more than $131,000, according to a NerdWallet analysis. It might not make sense to pay off your mortgage early if you can invest and earn a higher rate of return. However, paying off high-interest consumer debt, like credit card and personal loan debt, should be a top goal in 2018. Here are the first steps you should take on the path to becoming debt-free:
- Find out what you owe: Americans underestimate the credit card debt they owe by around 40% and underestimate student loan debt by 25%, according to a 2015 study from the New York Fed. Find your total debt balances by reviewing your credit report and account statements.
- Choose a repayment plan: Paying the minimums could leave you in debt for decades. Instead, make a plan to pay off debt aggressively. You could use the debt snowball method to tackle debt with the lowest balances first, paying extra until the debt is paid off, then reallocating payments to the next-largest debt. This method will reduce the number of debts you owe the fastest. The benefit is more psychological than financial; it's meant to give you a sense of momentum. You could also opt for the "debt avalanche" and put extra cash toward higher-interest debt first. This method will save you the most money in interest payments.
- Consider consolidation: If you have a lot of high-interest debt, consolidating could make it easier to repay what you owe. Tapping into home equity to pay off debt is usually too risky, but a credit card balance transfer or personal loan could allow you to consolidate multiple debts into one bigger loan at a lower interest rate.
4. Resolve to start living on a spending plan
More than three-quarters of all workers are living paycheck to paycheck, spending everything they earn, according to CareerBuilder. Here's how to ensure you're not spending your hard-earned cash unwisely:
- Track your spending: Most people underestimate routine spending by as much as 20% and fail to account for irregular spending. Tracking spending is essential to identify problem areas and to create a realistic spending plan -- rather than just a wishlist of where you'd like money to go. Track spending for at least 30 days to get a clear picture of your finances.
- Choose a budget technique that works for you: Use the information gleaned from tracking spending to make a realistic budget you can live on. There are different approaches to budgeting. For those who don't want to be bogged down by details, a 50-30-20 budget may work. You'd allocate 50% of income to your needs, 30% to your wants, and 20% to savings. You could also opt for a budget that assigns all money you earn to either savings or particular categories of spending.
- Cut out unnecessary spending: Budgeting works best if you cut out unnecessary spending. To cut spending, stop wasting cash on expired food, energy leaks, and expensive bottled water; cut subscriptions you no longer use; and implement simple savings solutions.
5. Resolve to increase your retirement savings
Americans participating in 401(k)s saved just 6.2% of income in 2016, according to Vanguard. This is far below the 15% to 20% of income you need to save for retirement. To ensure you're saving enough to avoid going broke as a senior:
- Choose the right accounts: Take advantage of all available tax breaks for retirement savings. Invest at least as much in a 401(k) as it takes to get any match your employer provides. Then, allocate any extra money into your 401(k), an IRA, and/or a health savings account. An HSA allows you to invest with pre-tax money and take out funds tax-free to cover healthcare costs, while an IRA often provides more low-cost investment options than 401(k)s -- and all of the same tax breaks.
- Increase your contributions: Americans are living longer, and the market's projected rates of return are dropping, so you'll need to save more for retirement than the standard 10% previously recommended. Increase your contributions this year by at least a little bit. If you're 30 years from retirement, an extra $1,000 invested in a 401(k) annually -- just $83 monthly -- could net you $110,218 extra in your 401(k) by retirement, assuming a 7% return on investment. Increase your contributions as much as possible by banking your raises and prioritizing saving in your budget.
- Make sure you're not paying unnecessary fees: If you're paying too much to invest, you could reduce your retirement account balance by hundreds of thousands. The difference between paying a 0.5% fee and a 3.5% fee on a $5,000 annual investment made from age 30 to age 65 is more than $286,000.
Your financial resolutions can help you put an end to money worries
According to Fidelity, 52% of people who made financial resolutions in 2016 felt strongly that they'd be better off financially in 2017, compared with 37% who didn't resolve. Almost half of resolvers also said they're in less debt than they were the prior year, compared with 35% who didn't make a financial resolution.
This year, make your resolutions count. When you end 2018 with less debt, more savings, and more financial security, you'll be very glad you did.