There’s never a bad time to get your finances into shape.
Almost half of those who set financial resolutions such as spending less, paying off debts and saving more for retirement achieve most of them, a recent Fidelity Investments study found. To set yourself up for success, break down each goal into manageable portions, says Mari Adams, a financial planner in Boca Raton, Fla.
Focus first on short-term fixes, then work on longer-term goals to stay on track in the future. You may find that getting your finances in shape this way is a whole lot easier than swearing off french fries.
Reduce your debt
For the short term: Wipe out credit card balances. Most of us carry our debt around the hips, where our wallets bulge with credit cards. American families with revolving credit card balances owe $15,149 on average, according to the Federal Reserve Board.
“Even good savers can run up big card debt due to unforeseen events,” says Michael Garry, a financial planner in Newtown, Pa.
When the Consumer Reports Money Lab analyzed ways of prioritizing credit card payments, it found that paying off the one with the highest interest rate first resulted in the least interest paid.
To proceed, pay as much as you can on your highest rate card each month, and the minimum on the others. When the first card is paid off, concentrate on the next highest interest rate card. Repeat until your credit card debt is history.
For the long term: Target your mortgage. Eliminating your mortgage by the time you retire is a worthwhile goal, Garry says, because even low-rate loans can be burdensome when you have less income.
Although rates have been rising, you may still be able to cut your mortgage debt by refinancing. You can also make extra payments toward your loan principal. By doing so, you’ll earn a guaranteed return on your investment equal to your mortgage interest rate. If your rate is, say, 5½ percent, you’re better off paying extra on your mortgage than putting the money into a low-yield bank CD.
Focus on your savings
For the short term: Consolidate your accounts. Bringing your accounts together at as few financial institutions as possible has a number of advantages.
For starters, you’ll have less paperwork to fuss with. And with all of your money in one place, your required minimum distributions from IRAs and the like will be easier to calculate. Your bigger total balances will probably entitle you to reduced fees and more personalized service, too.
If you already do business with a brokerage firm or mutual fund company that you’re happy with, that’s probably the best place to start. Call to ask what would be involved in transferring any other stocks, bonds, mutual funds, ETFs and so forth to that financial institution. Because you’re not liquidating the accounts but merely moving them to a new custodian, there should be no tax consequences.
For the long term: Sock away more for retirement. You might find boosting your retirement savings rate from, say, 7 percent to 15 percent difficult or even impossible. But nudging it up to 9 percent probably isn’t, Garry says. And Consumer Reports Money Lab found that the additional savings add up. For example, if a 50-year-old conservative investor who has been saving 7 percent of his salary increased it to 9 percent, at age 67 his nest egg would be at least 10 percent larger.
Putting your extra savings into your 401(k) plan, if you have one, is the best place to start, Adams says. For one thing, the money comes out of your paychecks automatically. Your contributions and the money they earn over time aren’t taxed until you begin withdrawals. And many employers still offer some kind of match.