Where would you like to be financially by this time next year? One of the biggest obstacles to financial freedom is a simple lack of planning. Perhaps even more important than determining where you’d like to be is determining how you will get there. To help guide the plan, here are five money management resolutions with the power to dramatically improve your financial outlook this year.
1. Reduce debt.
Debt is costly—and not just in terms of interest you pay. When funds are tied up in debt, they can’t be invested for your benefit. That means you also lose potential earnings you could have had if you’d been able to invest those funds. To build a more secure future, you must first reduce debt.
Ideally, you want to bring your total debt load to no more than 25-30 percent of your income and lower if possible. Make a plan to reach this goal over time by identifying the debts you can most quickly eliminate. For example, if your smallest debt is $500 on a store credit card, direct as much money toward it as possible until it’s paid off. Then move on to your next larger debt and repeat the process. This allows you to see quick progress, a powerful motivator to keep up with this resolution.
One positive outcome of debt elimination is a better credit rating. As you reduce your debt load this year, you may want to obtain your credit score to see where you stand. Every adult is eligible for one free score each year through freecreditreport.com. Additionally, you can consider ongoing credit monitoring with the Credit Karma Mobile app, also free.
2. Save strategically.
Debt reduction should be balanced with saving. It’s not a good idea to completely stop saving in favor of debt repayment. It’s important to keep at least a small emergency fund of $500 to $1,000 to avoid having to take out additional loans when unexpected expenses occur. As you reduce debt, continue saving, even if you can only manage a small amount. Then, increase it as debts are eliminated.
Here are a few recommended savings goals to target this year:
Emergencies. Aim for three to six months of expenses. Then the inevitable, unforeseen costs of life—health deductibles, car repairs, roof replacements—won’t stress you.
Large purchases. Saving up for a car, home improvement project or other larger purchase requires discipline and time, but it is better to delay a purchase than to finance it. To help you reach your goal faster, consider investing your savings so it draws more interest than what is typically earned through a standard savings account.
Retirement. Wherever you stand in preparing for retirement, resolve to go one step further this year. For example, open a retirement account if you don’t have one. If you do, begin automatic payroll contributions or increase your current contributions. These small steps will have an enormous impact on your future.
3. Become an educated spender.
If you’ve adopted the first two resolutions to reduce debt and save strategically, don’t undermine your efforts by spending more than you need to for life’s necessities. Beginning this month, investigate ways to spend smart, starting with the following:
The mortgage. Because a mortgage is usually the largest single debt for most households, refinancing it is one of the best ways to significantly increase monthly cash flow. A general rule of thumb is that if you can save at least one percentage point on your interest rate, the money you’ll save over time is worth the cost to refinance. Keep in mind, however, that if your credit score is on the low side, you may need to wait until it improves before attempting a refinance; otherwise, you may not qualify for the best rates.
Insurance premiums. Comparison shop your home, auto, health and life insurance to find the best premiums for the coverage you require. In addition, take advantage of every possible discount you can. For example, most companies offer a discount when you bundle multiple types of coverage under them. And some auto carriers offer a discount for paying your entire premium all at once rather than monthly.
Tax withholding. Getting a hefty return every year is not the best use of your hard-earned resources. Having too much taken out of your paycheck for taxes is the same as giving Uncle Sam an interest-free loan. Sure, you get the money back, but those funds could have been put to better use throughout the year by investing them or paying off debt.
4. Teach your kids about money.
As with most good habits, instilling long-term healthy attitudes toward money in kids is most effective if you start when they are young. This year, try some new ideas:
Delay gratification. One of most valuable gifts you can offer your children is an understanding of the difference between wants and needs. Rather than immediately granting a request for a new toy or gadget, establish an age-appropriate waiting period. This does two things: 1) pinpoints true desires 2) increases patience and gratitude.
Fill a jar. Label a jar with the name of a toy or something else your child wants. Every time they receive a gift of money or their allowance, have them add a portion or all of it to the jar so they can watch their savings grow.
Practice tithing and giving. When they’re old enough to earn an allowance or get paid for odd jobs, show your kids how to tithe and explain why. In addition, practice generosity as a family by helping fund a missionary family or supporting a special project you choose together.
5. Adopt a Kingdom view.
“But just as you excel in everything—in faith, in speech, in knowledge, in complete earnestness and in your love for us—see that you also excel in this grace of giving” (2 Corinthians 8:7).
As believers, every part of our lives, including finances, should be centered on Christ. God offers financial provision for your needs and His work of sharing salvation with the world. We have the opportunity to use that provision for an eternal purpose. When you give, you’re practicing a spiritual discipline that has the power to increase your faith and your gratitude for all of God’s blessings, not just financial ones. So this year, commit your finances to God, asking Him to help you honor His name and trust in His provision for your needs as you give. He won’t let you down.