As we move into the start of a new year, we often give pause and think about our goals and resolutions. In 2015, a Fidelity Investments survey found that 31% of respondents were making financial resolutions, and their top three goals were saving more, reducing debt and spending less.
Many resolutions fail within a few months because people take on challenges that are too big and they start to feel overwhelmed. So, we’re making it easy for you to accomplish your financial goals in the coming year. We’ve started you out with just one simple, easy-to-tackle task. And we’re hoping that the satisfaction of checking one thing off your list just might give you the motivation to do even more!
Resolution 1: Leverage your Income
The First Step: Invest in a 401(k) Account
As soon as the option is available to you, create a 401(k) retirement savings plan through your employer. By contributing a small portion of your income from each paycheck, you’ll be growing your retirement savings right from the start. And the best part is that your employer will more than likely chip in on your behalf, so your account will grow even more. The most common employer match is 50 cents for each dollar, up to 6% of your salary. If you’re questioning just how much you should contribute, at the very minimum, designate enough to max out your employer’s match.
A 401(k) will also help you out when your tax bill arrives. Because you don’t pay taxes on the income contributed to your plan (until it’s time to withdrawal the money), you’ll be taxed on less income.
Next Steps:
You may be facing a lot of “real world” problems for the first time. Earning a paycheck, paying bills or enrolling for insurance coverage. Creating a personal budget is a great way to get your head around the amount of income coming in each month and the amount of expenses you are paying out each month. Ideally, you should have a small savings remaining each month. If you find that you don’t, you may need to reassess how much you are spending and find areas where you can cut back.
If you do have a savings, fantastic! This is the perfect time to start an emergency savings fund. You never know when life goes a bit off track. You can handle a little adversity better when you have something to fall back on. It’s recommended that you build your emergency savings to cover 3-6 months of expenses.
Resolution 2: Reduce Your Debt
The First Step: Determine Good Debt and Bad Debt
Whether you realize it, there is good debt and there is bad debt. When you’re looking to “reduce your debt”, it’s wise to target the bad debt channels, such as high-interest rate credit cards. Reducing or eliminating bad debt improves your credit score and credit history, and therefore shows creditors that you’re responsible which can help in getting better rates in the good debt channels such as mortgages and home equity loans. Once you’ve identified your bad debt, make a plan to put any extra funds each month toward paying that debt down. Making more than the minimum payment can mean the difference in paying down debt in one year versus ten years.
Next Steps:
If you’re carrying most of your debt on credit cards, look into consolidating your balances onto one low-interest rate credit card. Lower interest means lower minimum payment and less interest paid over time.
Resolution 3: Buy Your First Home
The First Step: Check Your Credit Score
So many of the financial decisions that you make rest upon your credit score, and home-buying is no different. Your credit history and resulting score, determine the lending alternatives that are open to you, as well as the interest rate you will be charged on your loan. A good score versus a poor score can mean the difference of thousands of dollars over the course of your mortgage.
Your credit score is determined by looking at your payment history, the amount of debt you owe, the length of your credit history, the types of credit you have, and any new lines of credit you’re opening. Credit scores range from 300-850.
You’re able to check your credit score every year, free of charge, so this should be your first step in the home-buying process. If your score is lower than you expected, begin to take the necessary steps to improve it. This includes looking for any errors, reducing your outstanding debt, and ensuring that you pay bills on time and in full.
Next Steps:
If your credit score falls in the Good to Great categories, the next step in your house hunting journey is to get pre-qualified from a mortgage lender. After you provide information on your income, debt and assets, the lender can offer insight into the loan amount you could be approved for. This will help you determine your price range for a new home. But remember, this is not a pre-approval. There is no application and no complete background check. Getting pre-qualified is mainly a guide of affordability and the outcome of your actual application may differ.
Resolution 4: Prepare for Retirement
The First Step: Take Advantage of Catch-Up Contributions
If you find yourself approaching retirement age with not much retirement savings, time is still on your side. If you’re turning 50 years old in 2016, you can begin to make catch-up contributions to several of your retirement accounts. In your employer-sponsored 401(k) you can now contribute an extra $6000 each year. Additionally, you can save an additional $1000 to any IRA accounts you hold.
Next Steps:
Once you’ve maxed out your contributions to your retirement savings plans, you can think about how you will approach your Social Security benefits. You’re eligible to receive benefits once you turn 62, but you’ll only receive 75% of your full benefits. It’s not until you turn 66 that you receive 100% of your benefits. But, if you feel comfortable doing so, you can delay your benefits even longer, until age 70, which will result in larger benefit checks each month.
You’ll also want to make sure you have insurance coverage in place after retirement. Whether your company continues to provide benefits to retirees, you’re eligible to enroll in Medicare, or you’ll need to apply for a plan under the Affordable Care Act, making sure you don’t let coverage lapse.
What are your financial goals for the new year? We’d love to be your partner as you achieve your financial resolutions! Contact Diamond’s member service team with any questions.
