Common New Year’s resolutions include saving more and spending less. But such vague promises to oneself rarely bring results.
This article will give you three actionable financial tips that you can resolve to do starting on January 1, 2021. These tips are guaranteed to improve your financial situation and your feelings and thoughts about money in general. This information is from the desk of a noted bankruptcy lawyer in Philadelphia.
Tip #1: Make a Budget – and Stick to It!
Over coffee on the morning of January 1, 2021, sit down with pencil and paper and list all of your monthly expenses. Be sure to include occasional expenses such as holiday gifting, hair cuts, car maintenance, and the like.
Your list of expenditures will look something like this:
- Rent or Mortgage
- Renters or homeowners insurance
- Utilities such as electricity, gas, water/sewer
- Cable and internet
- Groceries and household supplies
- Cell phone and data plan
- Car payment
- Car maintenance
- Car insurance
- Tolls and fuel
- Student loan payment
- Health insurance
- Doctor visits copays
- Personal grooming
- Pet care and food
- Tithing to your religious institution
- Holiday gifting
- Dining out
Add up all of these expenditures. It should not exceed the household’s monthly income, but if it does, how are you paying the excess? Are you using credit cards?
Why Using Credit Cards to Fund Everyday Expenses is a Bad Idea?
When you start using credit cards for everyday expenses like filling the car with gas or groceries, and you have no intent or ability to pay the balance off in full each month, you are allowing the credit card company to charge you exorbitant interest on your revolving balance. This way, credit card debt spirals out of control in only a matter of months, and if you cannot meet your usual monthly expenses now, how are you going to make your ever-increasing minimum monthly credit card payment?
Here’s an example: you’ve been charging some clothing expenses to your credit card this month because you got a new job and need to build up your professional wardrobe. You charge $1,000 in total to your card. Your minimum monthly payment is $60, which you can barely afford, but you manage to make that payment every month.
It will take you 20 months to pay off that debt, and at 18% interest, you will have paid about $160 in interest. That might not seem like much, but how many of us 1. Can afford to tie up our credit for 20 months, and 2. Have a credit card charging only 18% interest?
This example assumes that nothing requiring your credit card happens in 20 months, but what if you need to charge something like a major car repair? Your minimum rises, will you be able to afford it? And what if your card charges 24% interest instead of 18%? It will take you 21 months to pay it off at $60 a month, and you will have paid $230 in interest – that’s almost four monthly credit card payments. What a waste of your hard-earned cash.
Do not use your credit card for everyday expenses. If you find you must, then you are overspending. You have two choices: earn more, or spend less.
How to Earn More
Look to your current employer first. Are you due for a raise? Can you get more hours?
If these are not options, consider whether you have a hobby or talent, such as crocheting or breeding dogs, that you can monetize. There are inexpensive ways on the web to advertise what you do or make, and perhaps that small bit of income will be enough to help cover all of your monthly expenses.
Think about it. Can you feed the neighbor’s cat while he is away? Are you qualified to coach a sport? Can you tutor in any particular subject area?
Scour Craigslist to gauge the need for your product or service. Even someone with no hobbies or special talents can drive part-time for Lyft or Uber.
How to Spend Less
Use your budget to find out where you can cut back. Can you lower the temperature in the winter and raise it in the summer? You will save on heating and AC costs if you can. Do you need that expensive cable or data plan? Research whether a less expensive plan will do the job. Can you eat out twice a week rather than three times? Can you get your hair cut every four weeks instead of three?
Finding ways to spend less is actually quite good fun. See how many places to save you can ferret out.
An Exception to the No-Credit-Cards-For-Everyday-Expenses Rule
The exception to this rule is if you are using a credit card to gain points, airline miles, or cash back, and you have the ability to pay off the balance each month, do so. That is just wise use of credit.
Tip #2: Pay Down Your Credit Cards
Okay, so we’ve already established that you rely on credit cards too much. Here’s what you do about that.
You’ve decided to either cut back on expenses or earn a bit more money, or a combination of the two in order to balance your budget. Now, what do you do about that credit card debt?
You pay it off. This may take a certain amount of scrimping for a few months, but in the end, you will be free of that debt, and you won’t be giving away your hard-earned money to the credit card company in the form of interest.
Let’s say you owe that $1,000 from the last example. By paying the minimum of $60 each month, you will pay it off in 20 months. But what if you paid $120 a month instead? You will pay it off in only nine months. Much better.
But where can you find that “extra” $120? Again, you need to earn more or spend less. Easier said than done, but you’ve since already balanced your budget, why not re-balance it including the $120 credit card payment?
Experts disagree on how to approach paying off credit cards, and the example we’ve been discussing assumes you only have one card with a balance. In fact, most Americans have three credit cards with balances.
Some experts say, start with the lowest balance and put as much money as you can toward paying it off while paying only the minimum on your other cards. When that card is paid off, pay as much as you can toward the second lowest balance, etc.
Other experts recommend starting with the balance that is subject to the highest interest rate, or the largest rotating balance. In truth, it does not matter. Pick a card and pay down that balance, then move on to the next card until they are all paid off.
This may take you a couple of years but will be well worth it, because once you have paid off your credit card debt…
Tip #3: Start an Emergency Savings Account
… you will be able to start saving for emergencies! Using your own money to fund emergencies is much less expensive than using credit. Put that $120 in a savings account each month, and in a year, you will have $1440.66 saved up at 0.1% interest. Sure, you did not make much in interest, but making $.66 is much better than giving $230 away in credit card interest!
Here’s that example again: let’s say you balanced your budget, paid off your credit cards, and have been saving for emergencies for a year. Terrific. You get that new job and have to spend $1,000 on your professional wardrobe. No problem!
You withdraw $1,000 from your emergency savings account, still have a balance of $440.66, save $230 in credit card interest, leave your available credit lines free, and then you resume saving. You are in a much stronger financial position than if you did not have emergency savings and had to charge that expense.
As soon as your credit cards are paid off, deposit the amount you have been paying to your credit card debt each month into your emergency savings account instead.
Follow these tips, and you’ll make 2021 the year you end up in the black!