While many people focus on physical health and wellness in the New Year, now is a good time to think about the wellness of your finances. Consumer debt remains at elevated levels and many people are still paying off their credit cards from the 2011 holiday season. We all know that accumulating December debt is a bad way to end the year, but between the sales, holiday gift lists and parties, it can be hard to stick to a budget.
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Just like a diet or a new exercise plan, a financial new year plan takes dedication and commitment. No matter your financial situation, one of the best resolutions you can make is to save more money and be more diligent with your finances.
The first step to improving your finances is to create a budget that works with your current personal finances. Examine your month-to-month income and expenses and look for areas where you can cut back. When examining your budget be sure to take every expense into account, rent/mortgage bills, loan repayments, credit cards and other expenses.
The next step is to take a look at your credit situation and figure out your debt-to-income ratio. As a rule of thumb, your total installment debt (e.g., credit cards, auto loans, student loans) shouldn’t exceed 25% of your annual take-home pay.
Credit card debt is often identified as the main reason people don’t build their savings. It is difficult to set money aside for the future when you have debt facing you now. If you have multiple credit card debts, pay off the credit card with the highest interest rate first then move on to the next highest and so on, until you have paid everything off. While you work to pay off your credit card debt, avoid using credit as much as possible so you’re not adding to the burden you are trying to reduce. Once you’ve paid off your credit cards, you can simply take the extra money each month and put it into savings.
If your debt is so large that you plan to ring in 2014 before having it paid off, it may be time to start thinking about debt relief options. Do your research carefully to decide which debt solution is right for you. You may need to negotiate with your creditors for lower interest rates and payments, consolidate your debt with a secured or unsecured personal loan, or enroll in a debt management program with a legitimate credit counseling agency.
C ertified counselors can help review your budget and make additional cuts to your expenses so you can build a better savings plan. This service is performed free of charge and it a very worthwhile investment of your time. Once you have your debt paid off, the savings can start rolling in.
Howard Dvorkin, CPA, is the founder of Consolidated Credit Counseling Services, Inc. and Power Wallet, a personal financial planning tool. Howard is a personal finance expert and consumer advocate as well as the author of Credit Hell: How To Dig Out of Debt.