This Year, I Resolve To . . .

Everyone wants to be smarter about money. The truth is, it doesn’t take much to do a better job. Small steps can lead to big changes – for the better. Take it upon yourself to try to incorporate at least one of these steps into your financial life each month (or each week, if you’re highly motivated).
 

As I always say, think of your financial life as an evolution, not a revolution. It doesn’t have to all happen on January 1st. But the sooner you take some easy steps, the better off you’ll be.

New Year’s Money Resolutions 2004

1. Know how much you owe. Write down each debt and what the interest rate is. Update your log each month.
2. Create a spending plan. You don’t have to earn that much money each year. The trick is to spend less than you earn. Create a spending plan that limits the extras and conveniences we treat ourselves to each year.
3. Pay off your credit card debt. You’ll never get rich while you’re in debt (except for mortgage debt). So if you have credit card debt, resolve to pay it off this year, starting with the debt that carries the highest interest rate (see #1).
4. Take your savings and bank it. If you cut something out of your budget (like refinancing your mortgage) and there is a tangible savings each month, use it to pay down your credit card debt or school loans. If your debt (other than your mortgage debt) is all paid off, bank the savings.
5. Save smarter. If you don’t have trouble getting your savings to the bank, but you have trouble leaving it there (also known as ATM disease), then put your cash in a place that’s a whole lot less convenient. Try an online bank (without an ATM card), or better yet, put your savings into a Roth IRA or an index mutual fund with a company like Vanguard (www.vanguard.com), and do your savings over the Internet.
6. Invest smarter. And while we’re on it, a little legwork can pay off big time. For example, if you have an emergency fund, you can probably keep half liquid in a money market fund (which could pay anywhere from .5% to 2.0%, if you’re willing to bank online). The other half could be earning bigger bucks for you in an 8-week CD. CDs aren’t as liquid as money market accounts, but it’s unlikely that you’d need to access 6 months emergency reserve funds on the same day. More likely, you’ll have enough cash to get you through until the 8-week CD comes due, and then you can make a different investment decision.
7. Look into index funds. Index funds (which are large groups of companies all rolled into one mutual fund) beat managed mutual funds (which is based on the fund manager’s individual stock market picks) between 85 to 90% of the time. So why do people buy something other than an index fund? They’re gambling that their fund manager is going to beat the index. Since that almost never happens, you’re far better off buying a fund that meets whatever index you’re interested in. Just remember that index funds are generally much cheaper than managed mutual funds, and that Vanguard has some of the least expensive index funds around. That company should be your benchmark.
8. Take advantage of any/all retirement accounts. If your employer offers a 401(k), 403(b) or 457 plan, you should take advantage of it. If you earn less than $160,000 (married, $95,000 if you’re single), open a Roth IRA and stash away an additional $3,000 per year. If you’re over the age of 50, you can take advantage of new catch-up provisions and stash more cash. If you’re self-employed, open up a Keogh, SIMPLE, 401(k) or any other kind of retirement account that you qualify for. Remember, when you fund a retirement account, you’re using pre-tax dollars (except for the Roth IRA, which is after-tax) which lowers the tax you pay today. So retirement contributions are tax-deductible and tax-deferred. That makes them a good deal even if your employer doesn’t match your contribution.
9. Choose a smarter credit card deal. Look at www.cardweb.com and www.bankrate.com for the best credit card deals. Get something for nothing (cash back, free gas, free miles, etc.) or transfer your balance to a card with a lower interest rate.
10. Open up an account with your credit union. If you’re eligible to join one, credit unions typically have the best financial deals going, from cheap or free checking accounts, to savings accounts that pay higher interest, to much cheaper financing for homes and automobiles.
11. Refinance your mortgage. Interest rates are still historically low. If you’re sitting with an interest rate that’s higher than the market, go to www.bankrate.com and see if you can refinance. If you had bad credit when you originally got your mortgage, and it’s been 1 to 2 years, see if you can refinance to a better deal. Never sign a mortgage with a prepayment penalty, because it limits your options down the line.
12. Prepay your mortgage. Every dollar you prepay earns you the net interest on your mortgage. So if your mortgage is at 6 percent, every dollar you prepay effectively earns you 6 percent. That’s a pretty good, guaranteed deal. If you make one extra mortgage payment per year, you’ll cut a 30-year loan to about 23 years. If you make two extra payments per year, you’ll cut a 30-year mortgage in half, saving tens of thousands of dollars.
13. Consolidate your online passwords. The smartest passwords contain letters, numbers and even characters. Decide on one or two passwords and then change all of your accounts to these passwords. Or, gather all of your passwords together and keep them in a secret file inside your computer, rather than the often-used, but completely unsafe method of using yellow message tags stuck or taped to your screen.
14. Write or update your will. If you have kids, and you don’t have a will, and you die unexpectedly, a judge that you’ve never met will decide who is going to raise your children. That’s a situation you want to avoid. So, write a will, designate appropriate guardians for your children (ask them first) and make sure the will is valid in your state. An estate attorney will write a simple will for you for as little as $500.
15. Buy enough life insurance. Term life insurance is cheap and you can buy it online without going through the process of using an insurance agent. Try www.QuoteSmith.com, www.Insure.com, and www.Quicken.com for starters. To find out more about different types of insurance, log onto the Insurance Information Institute’s website (www.iii.org ).
16. Save 5 to 10 percent of your take-home pay. If your take-home pay is $2,000 per month, you should aim to save $100 to $200 per month on top of whatever you’re doing with your retirement account at work. If you’re already saving that much, aim for 5 to 10 percent of your gross pay, which, if you’re earning $35,000 annually would be $1,700 to $3,500 per year, or enough to fully fund a Roth IRA.

NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.