M is for Money

It’s that time of the year again, New Year’s Resolution time. No doubt some of you have made a few resolutions this year, you may even have a few financial resolutions. This is a time for dreaming big, easy goals won’t do. Here are a few popular financial resolutions:

• Get out of Debt
• Stop Living Paycheck to Paycheck
• Save for Retirement
• Pay off a Car or House

These are great goals, but for most people this is like asking a couch potato to run a marathon. First you have to get up and start moving. You can take these larger goals and break them down into more manageable steps - expecting a complete change overnight is unrealistic. So what are some small steps you can take today to fix your finances?

Get Out of Debt

• Don’t Take on New Debt – Step 1 to getting out of debt, don’t take on any new debt! If you’ve got a debt problem, put away the credit cards. Debit cards provide the convenience and many of the consumer protections of credit, without the interest charges and years of repayment. Or go to a cash system. Change your habits to stop adding to the problem, or any plan to pay it off will fail.
• Track your Spending – Most people get into $5,000 of debt $10 at a time. Do you know where your money is going? Small habits add up over time. This step can be very enlightening even to people without a debt problem. Devise categories and track your spending over 2-3 months, a small notebook carried in your purse or backpack will do. Every time you spend money, pay a bill or have any other expense write it down. This task will help you identify unnecessary expenses and places you can trim your budget, you’ll need that money to pay off your debt.
• Automate your Payments – Many banks and lenders offer automatic payment plans, no more late fees. Set up your payments (more than the minimum) so you can focus on staying out of debt and saving up the money to pay off past debts.

Stop Living Paycheck to Paycheck

• Track Spending – Do you know where that paycheck is going? If you don’t know what your spending habits are, how will you change them? Living paycheck to paycheck is a cycle that has to be broken, often a spending problem is the cause. Since knowledge is power, tracking your spending is a good first step.
• Reduce Expenses – You need to break the cycle, one way is to reduce expenses. If you’ve tracked your spending, then you know what your expenses are. What ones can you cut? Rent and bills have to be paid, but are there cheaper alternatives? You could take in a roommate, move to a cheaper apartment, conserve energy and give up the cable TV. You should comparison-shop on your insurance, reduce your cell plan and maybe give up your car for mass transit. The retail therapy and expensive nights on the town are obvious places to start. If you are living paycheck to paycheck, then you can’t afford your lifestyle.
• Avoid Lifestyle Inflation – When you finally get that bump in income, keep living like it never happened. By living on your old budget, the additional money in your paycheck can be put towards savings. Once you start saving, you are no longer living paycheck to paycheck.

Save for Retirement

• Tax Advantaged Accounts – The government does not want to take care of you in your old age. They would prefer you take care of yourself, so they established ways of making retirement saving easier. There are several types of retirement accounts that allow you to save money pre-tax. If you are in the 25% tax bracket, each $100 you invest will save you $25 in taxes. Does your employer offer a 401k plan (or similar) and do they provide matching funds? Your employer’s match is free money, everyone should enroll and contribute at least enough to receive the full match. If your employer does not provide a retirement plan you can contribute to a tax deductible IRA. For 2009, up to $5,000 ($6,000 if you are 50 or older) can be invested and deducted from your taxes.
• Start Small – Most people put off saving and investing because they feel they don’t have enough money. It’s possible to start small, many mutual fund companies have lower IRA minimums. There are also automatic contribution plans that allow you to invest small amounts at a time. For more information see my post Investing with Little Money.

Pay off a Car or House

• Start A Snowflake – Take all the little bits of "extra" money in your life – rebates, refunds, the $5 bill you found on the sidewalk – and put it to work. This is an easy way to get extra money to pay down a debt. Either add it to your payments or save it until you have enough to pay off the loan. The latter is how I paid off my car loan early.
• Add Extra to your Payment –Can you put an extra $50 or $100 to your payments? Adding a little extra to each payment will accelerate your payoff and reduce the amount of interest you pay.
• Bi-Weekly Mortgage Payments – Do you get paid every two weeks? You can set up your budget to pay half of your mortgage out of every check – in effect you will make one extra payment a year. Don’t pay for a program that sets this up, you can simply save the money and mail in an extra payment once a year. Making one extra payment a year knocks 7 years off of a 30-year home loan.