It's that time of year when resolutions are all the rage, and cleaning up finances is an annual top priority for many people.
Now that weeks have passed, you may be second-guessing whether you can stick to your financial resolutions. However, the problem may be you picked the wrong resolution.
"A bad resolution is one you cannot stick to or achieve," says Rod Griffin, director of public education for credit bureau Experian. "Make sure your goals are realistic."
Here are three "bad" financial resolutions and some better options that can help you achieve the same goal:
Bad financial resolution #1: I will save more money
Saving more money is a popular resolution, but how you approach this goal could determine your rate of success.
"I don't think it's a bad thing to want to save more," says Danielle Prunier, a Merrill Lynch financial advisor at Century City South in Los Angeles. "But you have to think of it like losing weight."
In other words, you need to have a plan for how you're going to get there, and then break down the process into bite-size pieces. A vague goal like "save more" is less likely to be successful than one that says, "Save $100 a month."
3 better saving resolutions:
- Include a specific amount for savings in my budget
- Set up automatic deposits to my savings account
- Find higher savings account interest rates
To start, you need to budget for savings and figure out a way to automate those savings so you're not tempted to spend money earmarked for the future. For that, a 401(k) plan can be ideal.
"The number one way people can get ahead is to defer income to an employer-sponsored savings account [like a 401(k)]," Prunier says.
The money comes directly out of your paycheck so you'll likely never miss it. Employers may also match retirement savings contributions, which could double your savings immediately, depending on the match. As the cherry on top, contributions to a traditional 401(k) are tax deductible.
If you are already saving regularly but want to maximize that cash, make it your resolution to look for higher interest options for your money. Online banks typically offer the best savings rates for both regular accounts and certificates of deposit (CDs).
Bad financial resolution #2: I will get out of debt
When credit reporting company Experian surveyed people about their financial resolutions for 2016, credit cards were on the mind for many people with the greatest percentage of respondents pursing the following goals:
- Pay off a credit card: 28 percent
- Pay off the full credit card balance each month: 25 percent
- Pay credit card bills on time: 21 percent
- Not open more credit card accounts: 18 percent
"Reducing your credit balances and paying on time should always be financial goals," Griffin says.
However, like saving money, you need to have a specific plan to get there.
3 better debt repayment resolutions:
- Make progress with a debt snowball
- Consolidate debt at a lower interest rate
- Monitor my credit report regularly
A debt snowball is a popular planning method and typically lines up debts in order from either the smallest balance or highest interest rate. Once the plan is created, people make minimum payments on everything except the debt at the top of the list. That debt payment gets boosted with any extra money available each month. After it's paid off, the amount used to pay that debt is rolled into the payment for the next item on the list.
You can speed up your snowball by looking at ways to consolidate debts to a lower interest rate.
"Is there a way to roll a credit card with 10 percent interest into a 0 percent card for 12-18 months and accelerate payments?" Prunier asks.
Finally, make it a resolution to check your credit report each year. Mistakes can affect your credit score and increase the interest you pay. Every person is entitled to one free report every 12 months from each of the major credit bureaus. Reports may be requested at annualcreditreport.com
Bad financial resolution #3: I will spend less money
Spending less is a good way to free up extra cash for savings and debt payments, but it's a lousy resolution on its own. Like other bad resolutions, this one is simply too vague to be effective.
3 better spending resolutions:
- Prioritize my spending
- Limit purchases to only the amount I've budgeted
- Use an app or software to stay on track
If you want to spend less, you need to first separate your wants from your needs. Life insurance may seem like an expendable expense, but it's essential if you are the family breadwinner. A car might seem like a need if you have to drive to work, but yours could be a want if a less flashy - and less expensive - model could get the job done.
"Having some type of financial advisor in your life is a good idea," Prunier says.
She likens it to hiring a personal trainer or dietician if you're trying to lose weight. An advisor can also help create a workable budget and act as an accountability partner when you're tempted to overspend a certain category.
Not everyone has the money or time to hire an advisor, and in that case, technology can pinch hit. Programs like Mint, PowerWallet and YNAB (formerly You Need a Budget) can make it easy to create budgets, track spending and measure progress toward goals.
Those who are serious about improving their finances in 2016 should consider selecting goals from all the categories above.
"To be physically healthy, you have to modify meal plans and add cardio," Prunier says, continuing the weight loss analogy.
Along the same lines, get your finances healthy by spending less and saving more in the year to come.
Comment: What are your financial resolutions for 2016?
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