The start of a new year is an optimum time to get your finances in order. While studies have shown that making financial resolutions actually makes a difference in your financial life, it's important to have a plan for concrete action.
If you're not sure where to start improving your finances, here are 12 things you can do this year -- one for each month of 2018.
January: Automate contributions to savings
According to Vanguard's report "How America Saves 2017," more Americans are contributing to 401(k)s because more companies auto-enroll workers, and many auto-enrolled workers make the default contributions set up for them. The tendency to stick to the status quo can be used to your advantage, especially if you set up automatic contributions to a retirement account and to savings accounts.
Talk to your human resources or payroll department about setting up a 401(k) and contributing from each paycheck, if you have the option and aren't already doing so. If you don't have a 401(k) at work, set up an IRA with a brokerage firm and use your broker or your bank's online features to set up an automatic contribution on payday.
If you're already contributing to a 401(k) or IRA, increase your contributions. Increasing the amount you contribute by just $1,000 annually -- about $40 if you're paid biweekly -- could give you an extra $110,218 in your 401(k) by age 65, assuming you started at age 35 and earned a 7% return. Try to increase contributions over time until they reach around 15% to 20% of income -- though any amount you contribute is better than nothing.
While you're automating contributions, set up an automatic transfer to a savings account for an emergency fund, a house fund, a vacation fund, or any other goal you're hoping to achieve. If you transfer money on payday, you won't spend it and you'll quickly adjust to living without it. You could also use an app like Acorns or Digit to transfer small amounts automatically to savings without you even thinking about it.
The key is to set up some plan so you're automatically paying yourself first, instead of trying to save what's left over at the end of the month and finding nothing left.
February: Create a spending plan
According to the Willis Tower Watson "2017 Global Benefits Attitudes Survey," although budgeting and monitoring spending are closely correlated to feelings of financial security, only 35% of workers are budgeters who follow a strict spending plan. By contrast, around 44% of workers are reactive or impulsive spenders, and this group tends to live paycheck to paycheck, have credit card debt, and struggle financially.
Having a plan for where your money is going can give you peace of mind and help you use funds wisely. There are a number of approaches to creating a spending plan. You could take a simple approach by allocating 20% of your money to savings, 30% to optional spending on things like entertainment, and 50% to needs, such as housing. You could also create a detailed budget and allocate every dollar to a specific category, such as rent, utilities, savings, debt repayment, groceries, and more.
Whichever approach you take, track your spending for at least 30 days to see where your money is going, and make adjustments to create a realistic spending plan that works.
March: Tackle your credit card issues
The average credit card debt for U.S. households is $15,654, according to a 2017 survey by Nerdwallet. If you have credit card debt, explore options for reducing your interest rate. There are balance-transfer cards offering special 0% promotional rates -- usually for around 12 to 18 months -- that you could transfer the existing balance on your credit cards to. You'll typically pay a small fee of around 3% of the transferred balance, but won't have to pay interest throughout the year.
Ideally, make a plan to have the balance transfer debt paid off by the time the promotional period ends, since the rate typically goes up dramatically after the 0% interest expires. You could also consider consolidating your credit card debt using a personal loan with a lower interest rate.
If you don't have credit card debt but do use cards, make sure you're not among the 20% of people using a card that doesn't match your spending patterns. Look for a rewards credit card that gives you the most generous rewards for spending on the things you buy. Understand how the rewards work, and claim all you're owed.
And if your card has an annual fee, call and ask to have it waived or reduced. According to a poll conducted by CreditCards.com, 82% of people who asked were successful in getting their fees either waived or lowered.
April: Get smart about your tax refund
The average individual income tax refund in 2016 was $2,795, according to the IRS. If you receive a tax refund, use the cash wisely.
If you have high-interest debt, putting your refund toward paying it off should be a top priority. If you were making $300 monthly payments on a credit card with a 15% interest rate and a $15,654 balance, using a $2,795 tax refund to pay down this card would allow you to repay the debt in 62 months instead of 86; you'd pay $4,180 less in interest.
If you're not in debt but don't have an emergency fund, start one with your tax refund. You could also put your refund into a retirement account -- with an average-sized refund, you'd be more than halfway toward maxing out an IRA -- or invest it to accomplish other goals like buying a house, or taking a course that sets you up for advancement at work.
While there are lots of smart ways to spend a refund, you'd actually be better off if you didn't get a refund at all. Don't pay in more than you owe; instead of giving the IRS an interest-free loan, you want to keep your money available to invest or pay down debt throughout the year. Your employer withholds money based on the W-4 you filled out when you started working, so if you've been getting a big refund, change your withholding information. You may have to update this form due to tax reform anyway, so now's the optimum time to make sure you're getting your money to use when you need it.
May: Do some financial spring cleaning
The arrival of spring is a great time to not only do some spring cleaning at home, but also to get your finances in order by sorting through old paperwork, digitizing as much as possible, and disposing of items you no longer need.
Having your paperwork in order ensures you're ready in case of a tax audit. Audits can go back around seven years, so keep paperwork that supports your deductions for at least this length of time. As for credit card statements and bank statements, if they're more than a year old they can usually be thrown away.
In addition to sorting through paperwork, take steps to organize the rest of your financial life:
- Set up automatic bill payments, so you never have to worry about missing a big payment.
- Close old bank accounts or investment accounts you no longer use.
- Roll over 401(k)s from your old job if you're not happy with what they're invested in.
- Make sure the bank and savings accounts you're using aren't charging exorbitant fees, or paying less in interest than the going rate. If your accounts aren't working for you, shop around to find a different bank.
June: Institute "no-spend days"
According to Gallup, the average American spends around $100 daily, not counting money spent on a home, motor vehicle, or normal household bills. Many of us spend without really thinking about it, buying a coffee before work, grabbing lunch, and picking up a few things from the grocery store on the way home. If we skipped just a few days of spending, they could make a big difference.
To stop mindless spending, try a few no-spend days over the month of June. When you commit to a no-spend day, buy nothing; make do with what you have available. No-spend days get you out of the habit of buying, and force you to find other ways to entertain yourself and solve problems. Not only will you save money during each no-spend day, but changing your mind-set could also inspire you to make long-term changes.
July: Turn your unwanted items into cash
Summer is a prime time for garage sales, but you don't have to set up shop on the curb to turn unwanted items into cash. Sites like Craigslist and eBay provide opportunities for you to get rid of things you no longer need.
You can find out what your items are worth by searching one of these sites, or visiting some consignment stores; set a goal of selling as much as you can. Use the money earned to add to your savings, or to cover the costs of a fun summer activity you'd otherwise dip into your checking account to pay for.
August: Review your investment strategy
If you upped your investments in January, you're hopefully on your way to building a bigger nest egg. No matter how much you're investing, now's a great time to make sure your hard-earned cash is working for you.
Ensure you're taking the right level of risk based on your age, as investing too conservatively could mean you're not going to earn enough, while investing too aggressively puts you at risk of losing everything. One guideline for determining how much to invest in the stock market is to subtract your age from 110. If you're 35, you'd invest 75% of your portfolio in stocks.
If you're not sure where to start, buying exchange-traded funds or mutual funds is a simple option. You can also learn how to value stock for future purchases. And you can research investment strategies such as dollar-cost averaging or value averaging to find a system that works for you.
September: Hack your meal planning
With September arriving and kids heading back to school, you might find yourself buying lunches for your children and yourself, and you might eat out more because you're busy. The problem is, eating out can quickly get expensive -- and it may mean the food you buy for use at home doesn't get consumed.
The average American family spent $3,154 on food away from home in 2016, and the average American tosses out $1,365 to $2,275 in wasted food every year. If you diverted half your eating-out budget and most of what you're currently wasting, you could invest somewhere around $3,000 annually -- which, if you started at 35 and invested in an IRA at 7% returns, would turn into around $283,000 by age 65.
To make sure you're smart about not wasting food, make a weekly meal plan. Schedule meals you'll eat out and meals you'll eat at home, and buy only the ingredients you need. Take leftovers for lunch the next day so they don't go to waste, and plan to dine out when it's less expensive, such as going for a late lunch instead of an expensive weekend dinner.
October: Evaluate your insurance coverage
When was the last time you actually looked at your coverage from your auto insurance, health insurance, or homeowner's insurance?
Many people have policies that aren't working for them and don't even realize it. For example, a study in the Quarterly Journal of Economics found that many employees overpay for health insurance -- by as much as 24% of plan premiums -- by choosing low-deductible, high-premium plans when they don't need that kind of coverage. You may also be paying for auto insurance you don't need, such as collision coverage on a car that's now old and not worth very much.
Take the time to review your policies to ensure you have the right coverage. If you have an emergency fund, for example, you may want to raise your deductibles to lower your premiums. Drop coverage you no longer require and, if your circumstances have changed, let your insurer know. If you're working from home and driving much less, you may be eligible for a discount on auto insurance.
You also want to check that you aren't underinsured. Consider an umbrella insurance policy, which kicks in if you're sued for more than a primary policy covers, especially if you have substantial assets or a high income.
November: Spend smarter for the holidays
As the holiday season approaches, you may be considering going into debt for gifts. In fact, a Nerdwallet study of consumer holiday spending found that 56% of those who shopped during the 2016 holiday season incurred credit card debt, and many were planning to go into debt again in 2017 -- including some who hadn't yet paid off last year's bills.
Ideally, you'll have been budgeting for the holidays all year, so you have money saved to fund your gift-giving. But, whether you have money set aside or not, be smarter about how you handle the holidays. Talk to your coworkers and your adult family members and friends -- perhaps you could try a Secret Santa approach, rather than buying individual presents for every person. You'll save a fortune and end up with less clutter.
If you'll be shopping for holiday gifts on Black Friday or Cyber Monday, carefully research to ensure you're actually getting good deals and not being stuck with off-brand and low-quality items. And take advantage of coupons and discount codes whenever you buy, whether online or in a store.
December: Get your healthcare services before year's end
If you have a health plan with a deductible that ends at the close of the calendar year and you've already met your deductible, consider taking care of any medical issues now so the costs will be paid for. This could mean pushing up a physical or getting that comprehensive exam you've been waiting for.
This month may also be your last chance to spend the money you've invested in a flexible spending account (FSA), as many flexible spending accounts offered through employers require you to use money by the end of the year or lose it. Unless your plan gives you an extension or allows money to roll over, make sure you're not wasting the pre-tax amount you set aside to cover care costs.
You can spend your FSA funds on prescription medications, as well as some over-the-counter medications with a doctor's prescription. Insulin, medical equipment, and prescription eyeglasses can all be purchased with money in an FSA, so find something you can buy rather than losing the money.
Making smart financial choices all year long can leave you better off
By following these tips and making smart financial choices throughout the year, you can end 2018 with more money invested, your money working harder, and your financial life in order. Get started now, and make a few small changes every month, so you can ring in the next New Year as a more prosperous you.