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With the New Year right around the corner, take some time to start this new chapter in your life on the right foot and make the decision to improve your personal finances. Read on to learn more about 5 New Year’s resolutions to improve your personal finances in 2021 and choose at least one to commit to.
1. Make a Budget
The simplest step that you can take to improve your finances in the New Year is to create a budget. It may sound scary but it will give you a better understanding of where you’re spending your money and show you areas where you can save. Saving money will require you to change your spending habits, but it will be worth it! Imagine being just that much closer to your next financial goal, whether it is buying a house, moving to a better apartment, buying a car or paying for college.
First create a log of your monthly expenses in a spreadsheet, start with the big ticket items: rent or mortgage payments, car payments, student loans, car insurance, etc. Next is smaller bills like electricity, internet/cable, water, and phone bills. Then tackle the everyday expenses like the grocery store, eating out, and shopping. If you only pay with credit cards rather than cash it will make it easier to keep track of your spending.
Finally categorize all of your spending from the last month into car, house, food, and fun expenses. Divide how much you spend on each category by your take home pay for one month to find the percentage you spend on each category. If you find that you’re spending 30% of your take home pay on fun and you aren’t saving enough then make a resolution to spend less on fun. There are cheaper ways to have fun, even free ways! Learn about some ways to help you stick to your budget.
2. Emergency Savings
Many people don’t have a savings in case of emergencies. We don’t like to think about what happens if you get sick or injured and can’t work. But in order to be financially responsible and successful, it is important to have saved enough to cover a couple months of expenses without pay. This means you first have to calculate how much you spend in a month – this is explained in #1.
Then make a resolution to save at least that much this year! You have all of this year and all you have to do is start now! So let’s say you calculated you need $2000 to cover one month’s expenses, you only need to save $167 a month for one year. That’s the same amount as staying in for a few dinners instead of eating out or making your lunches at home instead of going out. Learn more about emergency funds in our article.
3. Set Up Automatic Payments
How can one person possibly remember that the mortgage or rent is due on the 1st of the month, electricity bill is due on the 10th, phone bill is due on the 12th, internet bill is due on the 15th, car payment is due on the 20th and water bill is due on the 25th? Easy! You don’t have to remember ALL of them….
Missed payments even for small things like electricity or internet can hurt your credit and can cause a big headache in your life when you get home and the lights don’t come on. Simplify your life – set up automatic payments for the smaller expenses. Electricity, internet/cable, phone bills, all of these things are usually under or around $200 and as long as you know you have that much in your checking account you can set up automatic payments and forget the due dates.
From personal experience, the bigger payments like rent or mortgage and car payments should not be automated unless you really have saved a lot in your checking account. The last thing you want is to not have enough money in your account. For these larger payments set up a recurring monthly calendar reminder in your phone for a couple of days before it’s due and the day it’s due – this way you have less of a chance of forgetting and you can check your account before paying for them. Find out more ways to simplify your finances.
4. Manage Your Debt
Most of us have some kind of debt, whether it is a mortgage, a car loan, student or personal loans, and credit cards. If you don’t have a handle on your debt it can seriously affect your credit and your life.
There are many methods of paying off debt, but we recommend using the avalanche debt method because it minimizes the amount of interest you pay on your debt and accumulate while paying it off. First identify all sources of debt in your life. Then find the fine print for each and figure out the interest rates. This is very helpful to set up a plan to pay off your debt because you may be focusing on paying one kind of debt off and then starting on another after when you’re racking up more interest than you ever realized.
List the sources of debt by interest rate, from high to low with their balances and minimum monthly payments. After accounting for all of the minimum monthly payments, see what amount each month you can allocate toward paying off your debt. Then use that amount only on the account with the highest interest rate. As you pay off each one make your way down the list and before you know it you will be debt free. To learn more, read our article Paying Off Debt: Snowball vs Avalanche Methods.
5. Improve Your Credit
All of the previous resolutions can actually improve your credit, however there are still some other steps you can take. First, check your credit reports – find out how to get your free annual credit reports in our article. Resolve any discrepancies with each credit bureau.
You can get your FICO credit score for free from Experian. It offers access to your Experian credit report and includes credit monitoring and alerts. Experian Boost also enables you to improve your credit score by adding payments that are left out of your credit history, like cell phone, utility bills and even Netflix, to your Experian credit report. The best part is that it’s free!
Now for the hard part…sticking to it! Decide which of these resolutions you’re going to commit to and start taking the steps today to start the year off on the right foot. You will only be successful if you make new habits. It’s time to break old habits and make room for new financially responsible and successful habits. You can do this – it will be worth it.
For more ways to improve your life, read our article 10 Habits To Make You More Successful.
We challenge you to choose at least one of these resolutions to commit to and see how it improves your finances!
Let us know in the comments which of these resolutions you decided to commit to this year!
Financial freedom begins with good habits.Rebecca & Tiago, theloadedpig.com