Personal Finance Resolutions for 2005

As we begin 2005, it’s time to recognize that owning a home isn’t just a floor with four walls and a roof. For most Americans, their house becomes the financial cornerstone to a solid retirement.
 

A study commissioned by the National Association of Realtors in November found that 6 in 10 homeowners have more home equity than stock wealth, and that homeowners accumulated wealth significantly faster than renters.

Unfortunately, home equity alone isn’t going to make you rich. Managing your financial future means taking responsibility for your major assets, including your real estate, your stocks and bonds, and any retirement accounts you may have. It also means spending less and saving more.

If you didn’t spend everything you earned this year on holiday gifts for the family, consider socking the rest away for that inevitable rainy day, when you’ll need to make some major repairs or do a renovation to your home. Or if, like millions of Americans, you lost a job this year– or are worrying you will soon.

Here is my annual list of personal finance resolutions you may wish to consider implementing this year:

Put yourself on a budget.

The proverbial “belt tightening” strategy isn’t particularly sexy, but it works. The goal is to spend less than you earn. And what money you do spend you should spend carefully.

Buy in bulk (if it’s cheaper), at sales, and in advance of when you’ll actually need something – which should help you avoid running to a convenience store at 3:00 AM and paying more than at the grocery store. Use coupons if you can.

The way to get rich is to watch your pennies. The dollars will take care of themselves.

Pay off your charge cards.

The average American has more than $8,000 in credit card debt. That’s in addition to a mortgage and a car loan. Of course, the reason we have debt is that we spend more than we earn. Simple as that.

Debt isn’t much of a problem unless you have financial dreams you hope to achieve. Like sending your kids to college, or owning your own home. For future homeowners, every dollar you spend to pay down your charge card debt or car loan each month is a dollar less that you’ll be able to put toward your monthly mortgage payment.

Lenders decide how much money to lend buyers based on a complex formula that compares how much you earn with how much debt you carry. If you decide to purchase a new car on credit two months before you start looking to buy a home, lenders will add that car loan into your total debts and decrease the amount you can spend on a home.

If you’re just about ready to shop for a home, don't make any big purchases that will either reduce the amount of money that you have for a down payment (if every penny counts), or will otherwise limit your ability to qualify for a loan.

Finally, while you’re paying off your charge cards, remember to pay them on time. Paying on time, over time, is the sure fire way to improve your credit history.

Pay yourself first and last.

This little bit of common sense is particularly helpful if you’re trying to save for a down payment or another major purchase. Each month, make out an invoice to yourself for the amount you wish you were saving. It could be $50 or $500. When you pull out your checkbook to pay your bills each month, take out the invoice and literally pay it first. Then, if you have any cash left over in your checking account at the end of your bill-paying session, pay yourself again.

The high-tech way to do this, of course, is to have your investment account (mutual fund or Roth IRA) electronically pull the money out of your checking account each month. Remember to mark this down, however, or you could wind up bouncing checks and needlessly spending additional dollars.

Once the money is out of your bankbook, you won’t spend it on something else. It doesn’t matter where you put the money, although if you write the check to your Roth IRA account, you’ll get a bonus: The money will grow tax-free. Want another idea? Send the second check to your child’s 529 college savings plan. The money will also grow state and federal tax free.

Pre-pay your home loan.

Another way to save big over time is to contribute a few extra dollars each month to your mortgage. Because of the way compounding works, every dollar you pre-pay saves you hundreds or thousands of dollars in interest over the life of your loan.

If you make one extra payment per year (either in a lump sum on January 1, or in 1/12 payments attached to your monthly payment), you’ll cut your 30-year loan to about 21 years. If you make 2 extra payments per year, you’ll cut your 30-year loan almost in half.

If you don’t want the hassle, but still want the savings, get a 15-year loan instead of a 30-year loan. Imagine buying your first home and paying it off by the time your toddler is ready for college.

Refinance when interest rates drop or when your credit improves.

Refinancing your loan can be a good way to find extra money in your budget each month. If you can save even $50 per month, that’s $50 you can invest in yourself and your future.

Refinancing with a no-cost loan may be a good way to go, particularly if you’ll be staying only a few years in your home before selling. Otherwise, consider paying some costs or fees and taking a long-term view with a super-low interest rate.

Keep up with your home maintenance.

If you keep your home in good shape, you’ll spend less over the years than if you let little things build into big problems that need replacing instead of repairing.

Regularly walk through your home, including the basement and attic, and around the exterior, looking for signs of rot, moisture, or pest infestation. The sooner you take care of these problems, the easier and cheaper they will be.

Borrow down payment money from your 401(k) or IRA only as a last resort.

The government allows you to borrow up to $10,000 from an IRA account for the purchase of a first home. Whether or not you can borrow any amount from your 401(k) or other retirement plan at work depends on the plan rules (check with your plan administrator).

Either way, carefully think it through before you borrow the cash. If the $10,000 is your entire retirement kitty, you may be jeopardizing a secure retirement. If the $10,000 represents only a fraction of your retirement savings, you may have more flexibility to borrow.

If you can, borrow the money from another source. If you take out a larger mortgage, you may pay private mortgage insurance, but your tax-deferred cash will continue to grow intact.

Contribute the maximum to your retirement plan.

If your employer offers you a retirement plan, your best bet it to take full advantage of it. But fund your retirement savings to the maximum anyway. If your employer doesn’t offer a retirement plan, open up an IRA as quickly as possible.

Retirement plans offer you tax-deductible and tax-deferred growth. That means, your money is growing far faster than if you had to use after-tax dollars or if you had to pay taxes on your earnings each year. If your employer matches your contributions, every dollar of that match is free money.

Save your change.

Every day when you get home, empty your pockets (or wallet) of change into a glass jar. After two weeks, drop the change and your lowest denomination bill into the jar. At the end of a month or two, take it to the bank. You’ll be shocked by how much you’ll save and how you’ll never miss it.

Creating a solid financial future isn’t about winning the lottery or speculating on a hot stock tip. It’s about being smart with the dollars you have in your checking account at the end of the month and the change left in your pocket at the end of the day.

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.