If you’re like me, your New Year’s resolutions are made to be broken. This often happens because we forget the importance of keeping them. In a time where company pensions are becoming extinct and knowing that your 401(k) plan can’t be your only means to save, planning for retirement is much more critical for you than it was for your parents. Resolve today to make your financial wellness a priority.
Resolution One - Pay Off Debt
Start by paying off high-interest credit card debt. If you have debt with interest rates over 5%, you’ll probably save more by paying down the debt than you’ll earn by investing that money. For example, it would take about 23 years and cost $8,616 in interest to pay off a credit card balance of $5,000 with just minimum monthly payments. But, boosting the monthly payment by $50 would eliminate that debt in a little over five years and save you $6,897 in interest.
Resolution Two - Build an Emergency Fund
Ideally, you’ll want enough cash saved to cover your living expenses for at least three to six months. If you’re single, cash reserves for six months may be safer. This is important in the event of illness or job loss. One great place to store this cash is your Roth IRA because you can access your contributions anytime for any reason without tax or penalty. Whatever you don’t need, can grow tax free for retirement after age 59 ½. Be sure to keep these IRA funds liquid in a bank account or money market fund. Keeping the funds in a certificate of deposit may earn you more interest, but you will pay a penalty for withdrawing before maturity. Once you have sufficient funds outside of your Roth IRA for your emergency fund, you can invest your IRA more aggressively for long-term goals and divert funds toward other goals, such as buying a car, increasing your nest egg or paying for college.
Resolution Three - Start a Savings Plan
First, identify your goals. Knowing your goals gives you incentive to making them become reality. We all want to retire comfortably some day, but you may have other goals as well, such as buying a home or providing for a child’s education. Some goals are more expensive than others. For example, a four-year public college education for a child born this year will cost $236,770. You don’t want to abandon your retirement savings plan to meet your other goals, but you should start saving small amounts now by setting up an automatic transfer and sending the funds to a separate high-interest account that you cannot easily access. Use your bonus or cut out unnecessary expenses, like eating lunch out every day, to save for your goals. The sooner you start saving, the sooner it will grow.
Resolution Four - Protect Your Credit
The most important things you can do to maintain a good credit score are to make timely payments, keep your debt low compared to your available credit and avoid applying for too much new credit. According to a study by the Federal Trade Commission, millions of Americans also have mistakes on their credit reports that could cause denied credit, higher interest rates and in some cases, loss of a new job. To protect yourself, check each of your three credit reports for free every year on AnnualCreditReport.com and dispute any errors immediately.
As we discuss ways to strengthen your financial fitness, don’t forget that the ultimate purpose of money is to take care of your needs and those of your family. Once you provide for your needs, meet some of your “wants” with a vacation or family outing to enjoy time together. Studies show that spending money on experiences creates longer lasting happiness than spending on material purchases.
REGARDLESS OF WHICH RESOLUTION YOU CHOOSE, YOU WILL BE MORE FINANCIALLY FIT IN 2015.