As 2014 approaches, it’s a good time to think about your financial decisions during the past year. Chances are, there’s room for improvement.
Regardless of where you’re starting from, follow these six steps to make 2014 a more financially secure year:
1. Consolidate your loans
If you’re just starting out, you probably have school loans and other loans. Since interest rates are at 45-year lows (Eisenhower was in office the last time we saw rates this good!), your first step should be to consolidate those into a single loan and lock that loan in at a low interest rate. You’ll get another break, too. If you’re single and earning less than $65,000 a year, you can deduct up to $2,500 worth of any interest you pay on student loans from your taxes, even if you take the standard deduction.
2. Pay off your credit cards
The average family has nearly $15,950 in credit card debt and the average interest rate is near 14.71%, according to the Federal Reserve. There’s no way, year-in and year-out, that you will make nearly 15% on your investments. Because of that, your No. 1 priority should be getting out of credit card debt.
3. Create an emergency fund
Most financial planners recommend at least a three-month emergency fund. You may want to re-think that and consider setting aside a good deal more. Many people who lose a job find themselves unemployed for nine to fifteen months or longer. People are finding it harder to find jobs, and you may have to take a pay cut when you do find one.
4. Contribute to your workplace savings plan
Whether it’s a 401(k), a 403(b) or some other employer-sponsored plan, take advantage of the tax breaks offered. If your company matches your contribution, don’t pass it up! Many employers match up to 50% of your initial contribution – that’s an automatic 50% return on your money. The only thing that should stop you is if you don’t have an emergency fund or you have high-interest credit card debt. In that case, pay that debt off first before you make any contributions above and beyond your company match.
5. Cut some slack
Think about all the bills you pay every month. There are bills for your cellphone, insurance, utilities, internet access and cable, as well as the monthly payments on car loans, credit cards and your home’s mortgage. Add it up, and you’ll probably find that a big portion of your paycheck is already spoken for, leaving you precious little money to save.
The solution, of course, is to trim these fixed monthly costs. Where to cut? It depends on what’s important to you. Some people can happily do without the cellphone, while others might ditch the cable television or raise the deductibles on their auto and home insurance.
But if you find it hard to save even a modest amount, focus on your debts, because that’s probably your biggest monthly cost. Since 1993, the national savings rate has plummeted as mortgage debt, auto loans and credit card debt have ballooned. By all means, slash your monthly mortgage payments by refinancing. But when you refinance, don’t cash out any home equity unless you are going to use the money to pay off higher cost debt. And, finally, think long and hard before trading up to a bigger home and taking on more mortgage debt.
6. Tie Your Hands
Now that you’ve identified ways to trim your monthly costs, you face your next challenge: making sure you save the money involved.
The smartest strategy is boosting your contribution to your employer’s 401(k) or 403(b) retirement-savings plan. It’s a great way to compel yourself to save because the money is pulled straight out of your paycheck and it’s gone before you get a chance to spend it.
Similarly, sign up for automatic investment plans, where money is deducted from your bank account monthly and invested directly in mutual funds you choose. Like payroll deduction into a 401(k) or 403(b), these automatic investment plans force you to save.
Additional strategies to crank your savings rate even more:
- Boost your savings rate by tacking extra money to your monthly mortgage payment, so you pay off your loan balance more quickly.
- Whenever you get a pay raise, further increase your 401(k) contribution or boost the amount you invest through automatic investment plans. It can be daunting to be told that you should save 10% to 15% of your income, so start with whatever you can afford and add a little more each year.
- Make a point of socking away all financial windfalls, such as medical-insurance reimbursements, money from a second job, tax refunds and year-end bonuses. Because this money isn’t part of your regular income, it is a fairly painless way to save more.
How are you increasing your financial security in 2014?