With each New Year a lot of people make resolutions that are unobtainable, or, are so hard to obtain that they give up before they even start. Dieting and improving your overall health is perhaps the most popular resolution you hear people throw around, but what about your financial health? Maintaining a good financial track record is beneficial to both your credit report and your wallet. I’m one of those that made a resolution to get my finances in check.
Here’s my advice on how to get that ball rolling
1- Understand Where You Stand
This first step is a little tedious, but before you can start making progress in any which direction, you need to have a clear understanding of where your money is going. I use Mint.com, which is great, but I’m not very disciplined in keeping it updated. I think a good rule of thumb would be to update it at the end of every week (Sunday morning) and to always use credit transactions. Since Mint.com is tied to your bank accounts, credit card accounts, etc, it can’t track you cash transactions. When I was still serving, Mint.com was virtually useless because I constantly forgot to deposit the cash after my shift was over and before I knew it, I had no idea how much total I made that week or exactly where it went. Yea, I had a general idea, but the point here is to know where each penny is going.
Have I mentioned how much I love Excel? Well, I do. In fact, I have a nice little excel sheet that breaks down my monthly expenses, the due date of each, how much I will be spending from each paycheck, and how much should be left over, which is always wrong because I have the mentality of “oh look, extra money, let’s go out to eat!” I also have a section where I predict how much I will spend alongside how much I actually end up spending that week and what it went towards.
Obtain a free copy of your credit report and actually take action. Each year you may request a copy from www.annualcreditreport.com. Look it over and check for mistakes or outstanding items that should no longer be reflected on your credit report (10 years for most, less for others). A good credit score is detrimental to your financial health. Borrowing is a part of life unless you are part of the 1% born into a millionaire family and money flows like water. Those with the best scores get the best rates, thus, saving them thousands of dollars over a lifetime of borrowing. The Federal Reserve has a great guide that will help answer any questions.
This can be pretty tedious to get started, but you will feel good after it’s all done and already have a better understanding of where each dollar is going. Or, if you prefer the lazy, more expensive route, hire a financial advisor to help you get started.
2- Make a Financial Map
Once you have figured out your assets, debts, and any savings, you now need to decide what it is you would like to do this year by creating a map. Do you want to save more? Do you want to pay off your debts and start saving next year? Do you need more income and thus need a new job or an additional source of income? Look at your handy excel sheet along with Mint.com to figure out where you can save money, where you are spending too much (car payments, late fees, etc), and how you can realistically reach your goal.
3- Be Realistic -Start Small
After you’ve decided what goal it is you would like to obtain this year, set an exact objective that is highly obtainable. I say start small because it’s much more encouraging to reach your goal and then be able to exceed it rather than being unable to reach your goal, give up, and start back at square one. For example, if you would like to start a savings account this year, open an account that doesn’t require a large amount up-front and see if you can automatically allocate a small amount each month from your checking account over to your savings account. $20-50 per month should be an easy goal to shoot for, depending on your income. Also be sure to research banks with the lowest fees. If you would like to spend less on food and drinks, go to the grocery store every Sunday and prep your meals for the week so you’re not tempted to go out to lunch and spend extra cash. Or if you want to save time, think of ways you can achieve that. For example, if you own pets, why not hire a poop cleanup company and have them pick up after your dogs while you’re at work? It might be a small thing but little things can add up so you have more free time to work on more important items!
4- Pay More than the Minimum Amount
Paying the minimum amount required on your credit card and other accounts will cause you to pay more over time due to interest, unless it’s an interest free account. Use a debt payoff calculator to figure out how long it will take you to pay off you balances, and then decide how much more you can put towards those payments. For example, if you have a credit card with a balance of $500 and you pay the minimum amount of $25 per month with an interest rate of 18%, you will end up paying almost $100 in interest over 24 months. Increase your payments by $15 more and you cut your interest almost in half and it will only take you 14 months to pay off.
There’s a lot of debate on whether or not you should pay off your highest balances or a bunch of smaller balances. I think it’s wise to pay off the balance with the highest interest rate and work your way down from there. It’s also a good decision to give your reps a call a see if you can get the interest lowered by stating that you’re actively trying to improve your credit by paying off your debts, which will improve your utilization ratio.
This is probably a lot to digest and doesn’t cover every tiny detail, but it should definitely help you get started. Feel free to copy my map to a better financial situation and provide feedback as well. Who knows, maybe you have a better idea than I do.