Everyone starts off the year with resolutions that reflect the best of intentions. But good intentions fade quickly unless you create a plan that leads to actions; and only actions, not intentions, bring about results.
It’s often said that the best way to reduce debt is by cutting up your credit cards. I find that strategy to be extreme and a poor substitute for discipline and smart decisions. Tackling debt is complicated, and many people fail at fulfilling debt-related resolutions because they simply don’t know where to begin or fail to look at the larger role that debt plays in our financial lives. Debt isn’t necessarily bad. Personally, debt enabled me to get through school, buy a home that I never could have afforded by paying cash, and take vacations using credit card miles. But uncontrolled, debt can be a bear that keeps us from achieving our broader financial goals.
Most debt falls into one of two categories: installment debt and revolving debt. Installment debt generally encompasses mortgages, car loans and student loans, which typically have set interest rates and fixed monthly payments. You can stay on top of installment debt by simply making your required monthly payments on time, which also helps build your credit.
Examples of revolving debt include credit cards and home equity lines of credit (HELOC). In general, it is better to pay down revolving debt first. Rarely does it make sense to pay down relatively low-interest installment debt (such as prepaying your mortgage) while you have outstanding revolving debt, which usually is more expensive and is subject to changes in rates and minimum payments.
If you have not already done so, consider refinancing your mortgage and student debts. Although current interest rates may be rising from their lows, they still are cheap compared to historical rates. When refinancing your mortgage, be wary of “teaser” rates that reset after a short period of time. I advise against an adjustable rate that resets in less than five or seven years and urge you to pay attention to the rate adjustment terms. However, depending on your future plans, a long-term fixed rate mortgage may not be your best choice either. There are online rate calculators that can help you run the numbers.
Over half of all Americans are carrying credit card balances; it’s not surprising that paying down credit cards is the single most common new year’s financial resolution. Doing so is a “twofer,” as improving one’s credit score is a frequent resolution as well. If you’re carrying high-interest credit card balances you might want to consider utilizing a powerful debt management tool often referred to as a ”balance transfer credit card.” You’ll need to do some online research and comparisons, but the short explanation is that you can open a new card and transfer your existing balances (within a time limitation), for either no fee or a reasonable fee. Such cards offer a very attractive feature: for a stated time, they are interest free. During this interest-free grace period, all the payments you make go towards reducing the card’s principal balance. Even during this grace period, you should make payments at least equal to what you had been paying before. Check out this option.
Regarding credit cards, be sure to compare their “points” programs and other benefits. My favorite card is the Amazon Rewards Signature Visa, which among other perks immediately refunds five percent on Amazon Prime online purchases.
A final words on credit: if checking on your credit score isn’t one of your financial resolutions, please add it to the list. There are online sources that you can use to access your credit score, and when necessary, repair the score. My preferred online source is annualcreditreport.com, which provides you with a free copy of your credit score. The better your credit score, the easier it is to obtain credit at more favorable rates.
The second most frequent new year’s resolution, after paying off credit card debt, is setting aside money for savings and investments. Whether you want to build a nest egg to purchase a first house, fund your kids’ education, or stash away funds for your retirement, having clear goals, as with most habits, is key to your success.
For many, the most proven path to accumulating wealth is to create a set-it-and-forget-it method of stashing away money. Does your employer offer an automatic payroll deduction plan? If not, you may want to consider a monthly systematic transfer from your checking account to an investment account. Also, some investment houses and fund families can facilitate periodic transfers. Good habits are best achieved through repetition.
If your employer has a tax deferred asset accumulation plan such as a 401(k), you should try to max out your contributions – even more so when there’s an employer match component. If you’re self-employed, look into the various tax deferral savings vehicles that you may be eligible to establish.