2016 is just around the corner, and with the new year come new opportunities to take better control of your finances. All sorts of financial timers reset on Jan. 1, which makes it a great day to get started.
Regardless of whether you're just starting on your journey to financial security or are well on your way, the sooner you begin following these three simple resolutions, the better your chances of winding up where you want to be.
Resolution No. 1: Get on Uncle Sam's good side, tax-wise.
From an income tax perspective, it's in your best interests to pay taxes on your income throughout the year really close to what you'll actually owe when you file your income tax return. If you have too much withheld, all you're really doing is making an interest-free loan to Uncle Sam with money you could otherwise be putting to work for yourself. But if you have too little withheld, you risk being hit with penalties on top of having to scramble to come up with the cash to pay your tax bill come filing time.
From a dollars-and-cents perspective, you'll want to set your withholding so that you meet at least one of the following IRS "safe harbor" conditions when you file your 2016 taxes by April 2017:
- You owe less than $1,000;
- You've paid at least 90% of your total tax burden for the year via timely estimated payments or withholding, or;
- You've paid at least 100% of your 2015 tax burden via timely estimated payments or withholding. (That percentage is raised to 110% for certain higher-income taxpayers.)
By setting you payroll withholding so that you meet by at least one of those safe harbor conditions, you'll avoid tax penalties and strike the right balance between having money in your pocket today and money in your pocket after tax costs.
Resolution No. 2: Get your debts under control.
Every dime you pay in debt-servicing costs represents extra money you're paying today for purchases you made in the past. Additionally, every dime you pay in interest is money above and beyond the purchase price that you're paying for whatever it is that you bought.
To make the issue of more urgent, interest rates have been nearly as low as they can get, and the Federal Reserve has finally started increasing its benchmark rate, to which many consumer rates are tied. All these factors make this the best time to get serious about getting out from under your debts.
The fastest way to tackle debt is "the snowball method": Line up all your debts, sorting them from highest interest rate to lowest interest rate. On all debts except the highest interest rate one, make the minimum payment each month. For that highest rate debt, however, you make a serious effort to pay as much as you can above and beyond that minimum, every month, to get it paid off quickly. Once that debt is retired, you roll everything you had been paying on it over to the next-highest interest rate debt and repeat the process.
By continuing to snowball your debts until every last one of them (with the possible exception of your mortgage) has been paid off, you rid yourself of a costly payment-and-interest burden. Once you've finished your debt snowball, the cash flow you had been putting toward making those payments is yours to use more productively. Which brings us to the final piece of advice ...
Resolution No. 3: Save more.
As the calendar flips to January, you have a superb opportunity to start saving more. The reason? Your taxes are going down a bit. Every year, the tax brackets are adjusted for inflation, and while the 2016 adjustment is small, the brackets are shifting to let you automatically keep more of what you earn. As long as you were making ends meet before that bracket shift, the government's move will free up a bit more money from each paycheck for you to save.
In addition, employers are expecting to pay about 2.9% more in wages in 2016 than in 2015 . That's a lot faster than the current near-zero inflation rate. Thus, as with the tax bracket shift, as long as you were making ends meet with your old paycheck, most of the money you get from your raise could be dedicated to increasing your savings. On top of any gains from raises and the tax bracket shifts, any money you free up through your debt snowball is also ripe to be routed toward your savings.
Perhaps best of all, the tax bracket change, any raise you may get, and interest you're no longer paying all represent opportunities to save more money with no real change to your overall lifestyle. What you'll likely find is that as you start saving more, you'll feel empowered by the sense of freedom you'll feel from seeing your money work on your behalf. If that inspires you to start cutting back on other expenses so you can save even more, then more power to you -- and congratulations on accelerating your journey to financial freedom.
Three easy changes -- a lifetime of benefits
Each of these three resolutions offers a fairly painless way to help you take control your financial future. Take advantage of all of them to make 2016 the year you really start putting your money to work for you.