Every financial strategy can use an overhaul at least annually – and there is no better time to plan for the future than the start of the New Year.
Achieve a “Ten” on Your Savings Goals
How much out of each paycheck are you saving for fun and security? Common wisdom is that everyone should be setting aside at least ten percent of his or her monthly income – a figure that is above and beyond pre-tax retirement savings. To know how much to put aside, simply multiply .1 by your monthly take-home pay. Therefore, if your net income per month is $1,500, an appropriate savings goal is $150; if it’s $2,650, save $265.
What can hitting the ten percent mark do for you? First, it provides an important financial safety net. You can use the money for unexpected expenses that you may normally charge. Second, it can satisfy a desire to splurge. You may use a portion of it for something enjoyable, like a vacation or a luxury item. Third is the psychological benefit: while saving money, you know that you are doing what it takes to safeguard your future.
Enroll in your financial institution’s direct deposit program to have ten percent of your income automatically transferred from your checking account and into a savings or money market account.
Delete Consumer Debt
If you are carrying high-interest credit card and personal loan debt, make 2008 the year to get rid of it (or at least make a significant dent in the balance). In most cases, it’s just too expensive to keep. For example, a $5,000 balance with a 21 percent interest rate costs $87 in finance fees for the month. Since a typical minimum payment for a balance this size is $125, only $38 of it goes toward the principal! At that rate it would take decades to repay. Start a more efficient debt deletion plan today:
Rather than pay the minimum, determine a realistic and fixed amount you can pay each month. Never go below that figure.
Call your credit issuer and request a reduced interest rate. If they won’t budge, consider transferring the balance to a lower interest card.
Suspend credit use. It doesn’t make sense to add to your balances while repaying them. If you want to use plastic during this time, use your debit card.
How effective is this plan? Assuming you have that $5,000 balance, by cutting the 21 percent interest rate in half and making a regular flat payment of $445, you’d be debt-free in just twelve months.
Give Your Credit Score a Boost
If this is the year you will be in the market for a mortgage or vehicle loan (or any loan or line of credit), take steps to increase your credit score! In general, the greater your credit score and financial circumstances, the less risk the lender takes when loaning you money. The most common credit score is the FICO, which ranges from a low of 300 to a high of 850. A good score starts at around 650, but the higher it is, the better financial product you will likely be eligible for.
Hike up your score by:
Obtaining copies of your credit report from all three major credit reporting agencies to check for and correct errors.
Paying all loans and credit lines on time, every time.
Making sure any credit card debt you have is well below the credit limit.
Keeping older accounts active.
Repaying any collection accounts, judgments, and liens you may have.
Only applying for necessary credit. Having two to four active credit instruments is a good rule of thumb.
By taking immediate and positive action, you could see a dramatic difference in your credit score in as few as six months.
Make 2008 the year you save for goals and emergencies, eliminate expensive debt, and increase your credit score so you can borrow at the least possible cost.