As we continue to ring in the New Year, we’ve likely made many plans for the year ahead. While weight loss, quitting smoking, and reading that Shakespeare collection are noble goals, it’s also a good time to look at our financial lives.
Yet, we’re afraid. Too often we neglect money matters at the beginning of the year. It’s easy to see why. American middle class pay has not grown in decades, and holidays are expensive. We spend money that we don’t have, and credit cards push the thought of paying for things off until January. Then, bills come due during the dark, freezing temperatures and in times of ice and snow.
Indeed, even thinking about finance is painful in January.
Rather than thinking about a sudden change to the way you work with your money, think about money the same way you think of changing your house or apartment over a year. Most of us don’t buy all new furniture and decorations on January first and live with it for the rest of the year. We buy a piece of furniture here and a lamp there; we make an adjustment in February, and another in August.
The following five tips aren’t instructions. They are ways of thinking about money as you move ahead in the New Year.
Invest in a workplace 401(k)
If you are employed, and your job offers a retirement account, or 401(k), take it. After setting it up, select a small percentage of your paycheck to go into the account. Many employers will even match what you put in, up to a certain value.
You will hear money advisors scold people about not “maxing out” their 401(k), or “contributing to the maximum company match.” It’s good to do both, but not everybody can in lean economic times.
Even if you can’t put in 3 percent of your income to get the full company match, put in 1 percent. Just 1 percent is better than 0 percent when working toward a retirement savings.
If you’re given the choice of what to invest in, don’t be overwhelmed, either. If you pick only one fund, look for the words “large cap.” If you still have a few choices after that, look for the “expense ratio” of each fund, and pick the one with the smallest expense ratio.
Then, you’re done. Sit back, and forget about it until you’re over age 65. Don’t ever touch it. Pretend it’s not even there.
Pay off high interest debt
You don’t have to understand what an interest rate is or does. Simply know this: big is bad. Look at your paperwork, and find out what your interest rates are on your loans and credit cards. Pay off the stuff with big interest rates as soon as possible.
You don’t have to pay more than the minimum on every loan you have, if you can’t. But do try to pay a little more than the minimum payment on the one with the highest interest rate.
If you’re lucky enough to be paying more than the minimum on two or three of your loans and credit cards, stop! Pay the minimum on all but the loan or credit card with the highest interest rate. Pay off the big guy as soon as possible, then move down to the next biggest.
Don’t let the amount fool you. If you have a credit card with $1,000 debt at 13 percent interest, and an auto loan worth $15,000 at 5 percent interest, tackle the credit card debt first, even though it’s less. Don’t forget to make the minimum payment on your auto loan though!
Start an emergency fund
Financial experts often want you to place six months salary in an emergency bank account. Like the maxed-out 401(k), it’s a noble goal, but not many people can do it.
Anybody can set up a bank account that they use as an “emergency fund,” though, even if it amounts to $20 a month.
$20 a month can be substantial. It can be a new tire on the truck, or a call to the furnace repair person next January. These are the little things that tend to put people into financial tailspins.
Save that windfall
In April, many of us will get a huge chunk of money back as a tax return. It’s become our routine to look at that as our bonus to spend on all of the fun things we can’t afford the rest of the year.
Think differently about it. Use half of it on fun this year, or a quarter of it if you can. Use the rest toward your emergency fund and to pay off high-interest loans. It’s not fun, but down the road it will help to build wealth and avoid debt.
Start to think of refund money as $200 worth of Christmas gifts, or a payment on the winter heating bill. It is money that can make life easier through the year, rather than give you a new TV, if you use it right.
Buy mostly on need and sparingly on want
Again, this is an idea that’s no fun – especially when we feel that every paycheck goes to utilities, auto and housing, and that we’re already spending most of our money on needs and not enough on things we want.
But remember: No matter how much money we have – and a common link between the rich and the poor – is that almost everybody says that they don’t have enough money to buy everything they want.
Want is a tricky goal. The more we make, and the more we have, the more we want. Spending on want will never totally fill our desires.
So, ask “do I need” this, before buying something. You may still want that television or that sports car, but you can be certain in the knowledge that you’re correctly managing your money. Nobody can have everything they want; let that be reassurance.