New Year’s Day is a time of optimism and an opportunity for a new beginning as people all over the world make financial resolutions to improve their quality of life for the upcoming year. As with any resolution, it is important to ensure it is realistic to your current financial situation and achievable. The last thing you want is to become unmotivated on January 2nd and not make any positive changes with your personal finances because your resolution is the equivalent of trying to jump across the Grand Canyon. These are some of the best personal finance resolutions to consider making for yourself.
1. Become Debt Free
If you received a pay raise last year and are searching for a good way to use that additional income, the best place to start might be trying to prepay your loans. By making extra payments on your student loans, home mortgage, or credit card debt, you will be able to save hundreds or thousands of dollars. You will want to ensure that the lender doesn’t charge a prepayment penalty as that can negate the purpose of paying ahead of schedule. Penalty or not, the feeling of one less monthly payment is still a great feeling.
Another option to consider is to apply for a lower interest rate by refinancing student loans, your mortgage, or other consumer debt. If you are not in the current financial position to make extra payments, having a lower interest rate will still reduce your monthly payments and you can still pay the difference to help prepay your loans by a few dollars each month.
After all, you are already in the habit of making the higher monthly payment as it is already. To avoid additional loan costs, choose a refinancing lender that doesn’t charge application, origination, or prepayment fees.
Regarding this resolution, you will want to follow the SMART criteria and commit to spending an extra $50 per month or contributing any after-tax salary increase to your loans until they are repaid.
2. Quit Living Paycheck to Paycheck
Another popular personal finance resolution is to start living within your means. Even better, live below your means. This means spending less than you earn. The first action you should take is creating a budget using a program like You Need A Budget or Mint that will help you organize your finances and compare your actual spending to your budgeted amount.
After creating a budget, you will need to stick to it. Your goal should be to try to be one month ahead of your finances. For example, your January expenses would be paid for with your December salary instead of waiting to get paid in January before paying any bills. This might mean having to reduce how often you go out to eat or downsizing your entertainment budget. Making financial sacrifices today can result in financial rewards in the future that wouldn’t have been possible before. It might be difficult for the first month or two, but, after seeing the rewards of living within your means and not having to worry about not having enough money to pay the bills will make this resolution easier to accomplish.
Living frugally doesn’t mean that life isn’t fun. It’s a common misperception that spending every penny of your disposable income on entertainment is the only way to enjoy life, but, diligent saving and sound money management can also be very rewarding.
3. Build an Emergency Fund
Did you know that 63% of Americans said they couldn’t afford a $1,000 emergency? This is a strong indicator that many might have to make the previous resolution regarding the need to stop living paycheck to paycheck.
Most financial experts recommend having 3 to 6 months of living expenses saved in a separate bank account that can be accessed rather quickly in the event of an emergency such as losing your job or unexpectedly needing to buy a new vehicle. If you currently do not have an emergency fund, start with small goals by first saving $500 of your disposable income followed by $1,000. After that, continue to increase the amount until you get up to the 6-month threshold.
Once you have money stored in an emergency fund, you need to make sure that money isn’t used to pay for regular bills or making a down payment on a beach house for your next vacation. Those expenses need to be budgeted for through the year. Hopefully, you will never need to use your emergency savings, but, nobody can predict the future and you will be glad you had money set aside instead of having to borrow money.
4. Save for Retirement
It is never too early to start saving for retirement. In fact, the sooner you start you actually have to contribute less than somebody who waits until they are 30 or 40 to make their first contribution because of compound interest and the magic of passive income. The majority of Baby Boomers and Gen Xers fear that they will not be able to retire on schedule and will need to work a few extra years so they can afford to retire. As nobody can predict the future, you might be forced to retire early for medical reasons or employer downsizing. If so, it can be difficult to find a job with the necessary income during these final years of your working career.
While you can contribute as much or little to your retirement fund as you desire, it’s recommended that you contribute at least 10-15% of each paycheck during your 20s and increase the allotment to 25% during your 30s and continue to increase the amount by 10% for each additional decade of life until you retire. This might seem excessive, but, the last thing any retiree wants is to outlive their retirement savings and have to re-enter the workforce or stop traveling in order to make ends meet.
There are several ways to save for retirement. The most lucrative option is enrolling in your employer 401k and maximizing any match they might offer. Depending on your 401k plan, you may wish to contribute more or invest the difference budgeted in a tax-advantaged Traditional or Roth IRA that allows you to invest in virtually any stock, mutual fund, or ETF that trades on the stock exchange. If you are already contributing the recommended amount for your age group, you might consider resolving to increase your contribution amount by 1%.
5. Increase your Income Potential
In addition to reducing your monthly expenses and investing for the future, you may also want to invest in yourself. Sometimes the best way to increase your financial situation is to improve your income potential. This might mean going back to school to earn a graduate degree, learn a new skill to qualify for a promotion, or simply change careers altogether if you have reached a stage in life where the quality of life is more important than a large paycheck.
You might also decide to work a side hustle in your spare time and use that money to make some extra money within your professional network if the salary potential at your full-time job is currently maxed out. As the employment climate is always changing, you need to continue to adapt to remain competitive and sometimes this requires some personal ambition and goal setting.