According to research from the University of Scranton, 45% of Americans make New Year's Resolutions, but just 8% of resolutions turn out to be successful. However, we'd like 2017 to be different for you by helping you resolve to get your financial house in order. Here are three smart money moves you can make in 2017, along with some tips to help you succeed.
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1. Get rid of credit card debt
High-interest-rate credit card debt can seriously hold you back financially. If you have high balances on your credit cards, then it doesn't make sense to save and invest for your future, so it costs both your present and future self big-time.
Think of it this way. Let's say you have $5,000 in credit card debt at 16% interest. At this rate, the interest alone is costing your $800 per year just to maintain the debt. Even the best investors in the world can only hope to achieve average annual returns of 12% or so, which would translate to a $600 expected gain in one year on a $5,000 investment. In other words, if you invest $5,000 instead of using it to pay off your high-interest debt, you're actually setting yourself up to lose money ($200 per year in this case) over the long run.
So one of the smartest moves you can make in 2017 is aggressively pay down any high-interest credit card debt you may have. Not only will it help you get on the path to financial security, but it can also improve your credit score, as I'll discuss later.
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2. Open an IRA, then max it out
If you haven't already done so, 2017 is a great time to open your first IRA, even if you have a retirement plan at work, such as a 401(k) or 403(b). IRAs come in two basic varieties: traditional and Roth. The main difference between the two is their tax treatment.
Traditional IRAs are "pre-tax" retirement accounts, which means your contributions may be tax-deductible (depending on your income), but your eventual withdrawals will be treated as taxable income. Meanwhile, Roth IRAs are "after-tax" retirement accounts. Contributions are not deductible, but qualifying withdrawals will be 100% tax-free.
With a traditional IRA, you cannot withdraw any funds until you reach age 59-1/2, lest you pay a penalty plus income tax on the withdrawn amount (though there are exceptions in some circumstances). Roth IRA contributions (but not earnings) can be withdrawn at any time, for any reason. Furthermore, while traditional IRAs have required minimum distributions once you reach age 70-1/2, Roth IRAs do not. In order to contribute directly to a Roth IRA, you need to meet certain income restrictions.
With both types of accounts, you can contribute up to $5,500 for both the 2016 and 2017 tax years, with an additional $1,000 annual catch-up contribution allowed if you're over 50. I mention the 2016 tax year because you can still take advantage in 2017; the IRA contribution deadline isn't until the tax deadline in April.
Your IRA contributions can be invested in any stocks, bonds, or mutual funds you choose, and they can grow and compound on a tax-deferred basis. In other words, you won't pay capital gains or dividend taxes each year, no matter how much your investments grow.
If you plan ahead, maxing out an IRA might not be as difficult as you think. The $5,500 maximum contribution translates to $458.33 each month, $229.17 semi-monthly, or $211.54 every two weeks. Planning to contribute every time you get paid could make the process easy, and you'll be surprised at how quickly your account balance grows.
3. Maximize your credit score
As SubscriberWise CEO David Howe proved, a perfect 850 FICO score is indeed possible. However, it isn't necessary to strive for perfection when it comes to credit. As Howe said in a 2014 interview, a perfect score requires a "perfect storm" of credit strategy and life situations, which may not be possible or practical for you to achieve.
However, maximizing your credit score is a good idea. Achieving the best score you can by following a few simple rules could save you thousands of dollars next time you finance a major purchase. Consider the difference in interest over the term of a 30-year, $250,000 mortgage, depending on your credit score.
|FICO Score Range||Average APR||Monthly Payment||Total Interest|
Data source: myFICO.com. Rates are current as of Dec. 22, 2016.
While the FICO credit scoring formula is a closely guarded secret, the general structure of your score is public information. Specifically, the FICO score is made up of five categories of information:
- Payment history (35%) -- The biggest factor in a good credit score? Simply paying all of your bills on time.
- Amounts owed (30%) -- There are a bunch of factors that go into this category, but one key point is that this doesn't necessarily refer to the dollar amounts you owe. Rather, a big part of this category is the ratio of your credit card balances to your credit limits and the ratio of your loan balances to the original principal. To maximize this category, you can start by keeping your credit utilization ratio under 30%, and lower is better. If you can't pay down enough to get there, another strategy is to ask some of your creditors to raise your limits, which will lower the percentage of your credit being used.
- Length of credit history (15%) -- There are some factors here that you can't control, such as the age of your oldest credit account. However, the ages of your individual credit accounts and the average age of all of your accounts can be helped by only applying for new credit when you really need it. Also, closing one of your older, unused credit accounts can bring this average down and ding your score, despite what you may think.
- New credit (10%) -- This includes newly opened credit accounts as well as "hard inquiries," which occur when you apply for credit. One or two inquiries or new accounts won't hurt you much, but more than a few can significantly hurt your score. Let your current accounts age, and only apply for credit you need, just like the last category.
- Credit mix (10%) -- This one may come as a surprise. One-tenth of your score comes from the variety of credit accounts you have. For example, if you have a mortgage, auto loan, student loan, and credit card, then that mix could boost your score more than having just one or two of those (assuming you pay them off diligently). Don't open unnecessary accounts, but if you've been putting off getting a credit card, for example, then applying for one could help.
Knowing how the credit scoring formula works is a good first step. You can read some more credit-improvement tips from our experts here.
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