Posted on January 10, 2020 Last Updated: May 11, 2021
A New Year’s Resolution You Can’t Afford to Ignore
When you think of New Year’s resolutions, you probably think about losing weight or giving up a bad habit, but the beginning of a brand new decade can also be an ideal time to hit the reset button on your personal finances. Financially speaking, January can be a tough month to get started with carryover from the holidays, but the longest journey starts with the first step. The good news is that you can take some small, basic steps to improve your personal bottom line without making big adjustments to your standard of living.
Step 1 – Budgeting
Planning (and sticking to) a budget can go a long way in keeping you on a solid financial path. A budget is a visual of your personal finances using your monthly income and your monthly expenses. To start an easy budget, create a spreadsheet or simple chart and list your income on the left and your expenses on the right. For expenses, start with the must-have expenses like housing, utilities, food, water, prescriptions, auto expenses, insurance, other debts, etc. Create a separate section on the expense side for things that are nice-to-haves like entertainment, cable/internet, phone service, etc. After totaling up your expenses, compare to your income to find out what is left to save or spend on your nice-to-haves. If you find that there isn’t much left after subtracting your expenses from your income, you’ll want to re-evaluate and see where you may be able to cut expenses to meet your basic needs.
Step 2 – Review your expenses
It is easy to overspend and blow past a monthly budget, which means it is time to tighten up your expenses. The first thing to do to get your spending under control is to understand where your money is going, which helps you identify areas where you are overspending. If you want to lose weight, you may keep a food log to track calories; taking inventory of your finances is no different. Once you see spending patterns of excess, you can begin evaluating your wants versus needs and make adjustments. For example, if a $5 morning coffee is a habit, consider making coffee at home for a month. Small purchases like coffee add up and can put your monthly budget in the red.
Step 3 – Become a saver
Now that you know where you can trim expenses, make savings a priority by setting realistic savings goals. If you are like many Americans, you may not have enough in your savings account to cover an emergency expense such as a job loss, brakes for the car, a health event, etc. Saving money gives you a cushion and can reduce the stress that comes with these events.
Since a large percentage of your monthly take-home pay goes toward living expenses, car payments and paying on credit card balances, it may be difficult to know where to begin. Start by paying yourself; take the money you’ve saved by cutting back on everyday expenses and deposit those funds into an interest-bearing savings account like a money market, certificate of deposit, or retirement account (like an IRA) at your local credit union or bank.
Step 4 – Pay down your debts
Paying off credit cards can free up additional income. Consider listing out your credit card balances in order of smallest to largest and start paying as much as you can on the smallest balance. Once that account is paid off, you can either take the minimum payment and add it to your savings account each month or combine that payment with the minimum payment of your next lowest balance and pay that account down faster. Continue this until all of your credit card balances are zero, and then you can take the monthly payments for those cards and apply them to your savings account. It’s easier than you think, and once you get the momentum going, you’ll feel a huge sense of relief to see the credit card balances shrink and your savings account balance grow.
Knowing the interest rate you pay on your credit cards is also a key component, and you may be surprised how much extra money you’re paying by using high-rate credit cards. Consider searching for a credit card with a low introductory rate, or a lower everyday rate, and transfer your balances to one card. This may enable you to pay your balances off more quickly, and it is easier to manage.
Step 5 – Know your credit score
Your credit score factors into your daily life; it can affect your ability to rent or buy a home, purchase a car, open a cell phone account, and in some cases, get a job. In most cases, you can access credit even with a less than stellar credit score, but it comes with a price tag in the form of high-interest rates, which means you’re paying significantly more to borrow money. The sooner you can clean up your credit and start building your score, the better for your short- and long-term financial health.
Credit card companies, banks and other lending institutions regularly report to the three major credit bureaus: TransUnion, Equifax and Experian. Late payments, bankruptcy accounts in collections and other historical data all factor into your overall credit score. Timely payments, making more than the minimum payment, and paying off balances all can help increase your credit score. You can obtain your credit score from TransUnion, Equifax, Experian, or from other sites where you can receive a composite of all three.
Step 6 – Maximize your income
The other side of the financial equation is your income. As you work on reducing expenses and paying down debt, the fastest way to accelerate your financial goals is to earn more income. While it may be difficult, you may be able to maximize your position at your current job, look for opportunities to advance within your company, search for another job with better pay and benefits, or even increase income with side jobs. Put your skills to work when searching for odd jobs. For example, computer work on the side, dog walking, ridesharing, etc., are all jobs you can do in your free time. Adding even a few hundred dollars each month can help you boost your cash flow and achieve your financial goals faster.
Start 2020 off on the right foot
Getting your finances back on track isn’t an easy task and can be intimidating but rewarding once you start seeing results. While it might be difficult to tighten your belt at first, you will feel a sense of relief once you’ve paid off debt and built up a healthy savings balance.
You don’t have to do it on your own; there are resources available to help you. Banking partners like KEMBA Financial Credit Union, offer complementary resources and access to financial counselors, as well as online resources such as budgeting guides.
You can find more tips and ideas for managing your money online in the KEMBA Learning Station. If you have questions about your personal finances, our experienced KEMBA Member Service Representatives can help. You can stop into one of our Central Ohio branches, or view our financial counseling resources at kemba.org, or call us at 800.282.6420, option 4.