There’s nothing like the first few weeks of a new year to jump-start your personal finance resolutions.
First comes the after-Christmas hangover of credit card bills and gift returns.
But as we leave 2008 behind, there’s never been a better year to start the rebuilding process.
As a nation, we started saving again last year, for the first time in ages, even as our net worth plummeted — thanks to the steep declines in home values and our diminished 401(k)s and IRAs.
While many Americans once turned to their credit cards and home equity lines of credit to fuel a lifestyle that was beyond their means, this year many creditors clamped down on open lines of credit. Many found their maximum available credit limits reduced and home equity lines of credit closed, even if they were current on all of their payments.
Millions of Americans lost their jobs, and ran their personal finances into a brick wall, as the payments on their pay-option adjustable rate mortgages (ARMs) jumped. This despite the Federal Reserve lowering the Federal Funds rate from 4.25 percent in January 2008 to zero by December.
The number of foreclosures and shorts sales increased, even as the number of new and existing homes sold fell dramatically. It’ll take nearly a year to sell the inventory of existing and new homes — and that’s without listing a single new home.
As we ended the year, it became clear that the recession was going to be deep, and hundreds of thousands of Americans likely losing their jobs in 2009. The financial and emotional pain of this recession will be felt for a long time to come.
But just because a recession has taken hold doesn’t mean there aren’t things you can do to improve your personal finances. Since we are at the beginning of a new year, take the time to do a frank assessment of where you stand today. Then, create a vision of where you want to be by December 2009.
With some careful planning, you may be able to get there. In this week’s column, we’ll start a conversation about how to make your finances real estate-ready and get your credit in home buying shape.
This year, I resolve to:
Put myself and my family on a budget we can afford.
For most Americans, the word “budget” turns the stomach. If that’s how the word makes you feel, don’t use it. Let’s look at concepts instead.
Let’s start with something simple: Spend less than you earn. Buy in bulk (if it’s cheaper), at sales, and in advance of when you’ll actually need something. (If you wait until the last minute, it’ll generally cost you more to get the same item.) Cook at home more often, and use coupons if you can. Avoid take out foods and save restaurants for special events.
The concept you want to focus on is “trading down.” Each week, try to find a simpler and less expensive way to do the same thing. If you drink a bottle of $25 wine each week, try to find one you like at around $8 to $10 per bottle. If you’re eating out twice a week in restaurants, cut that back to once a week or once every other week.
If you’re spending $200 per night out (babysitter, dinner, theatre, movie, transportation, etc.), try to cut that to $100 per night.
You don’t have to use the word “budget.” But you should find a way to track your expenses (Mint.com and QuickenOnline.com are two of many choices), income and investments electronically, so you can see what you’re spending and when.
Pay off my charge cards.
The average American has more than $9,000 in credit card debt. That’s in addition to a mortgage and a car loan. More twenty-somethings are paying off school debt than ever before.
Debt isn’t much of a problem unless you have financial dreams you hope to achieve — or you like to sleep at night. 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. (While lenders have, in the past few years, extended an increasing amount of credit, traditional debt-to-income ratios are now being enforced.)
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 myself 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 bank or financial investment company electronically pull the money out of your checking account each month and send it to a different account. The thinking is, if you don’t have the cash in your pocket, you won’t spend it. (Remember to mark this down, however, or you could wind up bouncing checks and needlessly wasting additional dollars on bank fees.)
Once the money is out of your checkbook, you won’t waste it thoughtlessly. 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 forever. Looking for another good idea? Send the second check to your child’s 529 college savings plan. The money will also grow state and federal tax free (depending on the plan you choose), and you may get a state tax deduction for your contribution next April 15. If you’re saving for a large purchase, like a house, put it into an interest-bearing account somewhere relatively inaccessible.
In recent years, companies began introducing the Roth 401(k), an after-tax option that allows you to salt another $15,000 away for your retirement. Like a Roth IRA, the cash grows tax-free forever. While there are no income limits for participants, your company has to offer it as a benefit. See your human resources department for details.
Next Week: More ways to make your personal finances “real estate-ready.”
Jan. 19, 2009.
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