Financial Resolutions

This is the era of fiscal responsibility. In the past few years we have seen a shift in the thinking of the average American. This shift has been caused by a reaction to the recession and a revaluation of assets, especially real estate and stocks. For most Americans, there is more work to be done. With the New Year upon us, it is time to make a few “financial resolutions.”

Get control of spending. The holidays are over and the tab is coming due. Less of us are over-spending on gifts this year. However, regardless of whether you have over spent or not, taking control of your spending habits is a “year-round” job-not one that calls for restraint only during the holidays.

Start with the formulation of a budget. List your fixed expenses (ones that can’t change) first and then variable expenses. For example, you can’t change the cost of your social security taxes or your car payment. But you can change how much you spend on entertainment or cigarettes every month.

Now ask yourself a very important question. Which variable expenses can be reduced? Certainly, you probably guessed that we would suggest you stop smoking. Here is a habit that costs you every month and in the long-run is likely to increase your cost for health care as well.

Don’t stop there. Look hard at the fixed expenses. Can you reduce some of these as well? For example, could you refinance your mortgage? How about shopping for lower-cost car insurance or raising your deductible? For many, health insurance costs are taking up a larger part of their monthly budget. Can this cost be reduced?

The final step is to follow the budget. That means assessing what you spent each month and making monthly adjustments. If there are extraordinary expenses such as house maintenance, did you budget for these?

Get control of your debts. Of course, the largest fixed expense for many Americans is their monthly payments for debts. Credit cards, car loans and mortgages all come under the “debt” category. The money you save by reducing spending should be put to work doing two things. The first thing is reducing debts because this will make more money available for saving in the long run.

It is important to note that paying off your debts is a science. You should not undertake this task randomly. Here are a few rules:

•  The earlier you pay off debts, the more benefits you will receive. It is the same concept of saving. The earlier in life you save, the bigger the payoff in the end. The earlier you pay off debts, the greater the debt payoff benefits.
   
• Start with smaller debts first. In the “debt roll down” method, you pay off the smallest first and then use the savings to pay off the next largest debt. When you have finished paying off consumer debts, then you can work on the mortgage if you own a home. With the savings of hundreds or even thousands of dollars per month on consumer debts, you will be surprised at how quickly you can pay down a mortgage. You should also pay off the mortgage last because the mortgage is tax deductible while consumer debts are not.
   
• Start saving. The second use of the money you are not spending is to start saving. You should start by making sure you are making full use of your 401K or other retirement plan. This is important not only because of the need to save for the long-term, but also because you receive a tax benefit for this saving. Think of it this way. If you are in a 30% tax bracket, the government is making a contribution of $300 for each $1,000 that you put into your retirement plan.

Yes, you should also save for emergencies and contingencies. That is what makes budgets work. Remember, you are not saving for the next big purchase. You are saving for true emergencies such as having to replace a roof or medical situations.

The formula is clear. Spend less and use the savings to pay down debt, save for retirement and save for contingencies. Together this is a winning formula which will serve you well not only this year, but for years to come. You can use this formula to achieve long-term goals such as a comfortable retirement or purchasing your first home...