Tips to improve finances in the new year

January 04, 2008|By LYNN LITTLE

Are you looking for ideas to improve your finances in the new year? Consider the following suggestions for your New Year's resolutions:

  • Set financial goals. It takes discipline and focus to postpone spending in the new year for a goal that might be years, even decades, away. That's why having specific goals is so important. They provide an incentive to save and something to strive for. Put a date and price on each financial goal. Once you have a total cost, you can break it down into smaller pieces, such as "save $600 a year for three years" and even smaller pieces, such as "save $50 per month."

  • Commit to saving regularly. Small amounts of savings add up. If someone saves $2,000 per year from age 20 to age 66, they would have $975,000 accumulated after 46 years, assuming an 8 percent average return. Savers who wait until age 30 and save $2,000 per year for 36 years would have $440,000 and those who wait until ages 40 and 50 and save $2,000 per year for 26 and 16 years, respectively, would have $188,000 and $73,000.

  • Pay yourself first. Set aside an affordable amount each month in accounts for your financial goals.

  • Accumulate an emergency fund to cover at least three months of expenses. This is savings set aside specifically to meet emergencies or unanticipated bills or to cover monthly living expenses if your paycheck stops (e.g., unemployment). Too often, people use credit cards or borrow from family members in an emergency because they don't have a savings account to fall back on when unexpected things happen.

  • Make establishing an emergency fund a priority. Fund it with approximately three to six months of living expenses or whatever amount gives you peace of mind. Whatever you withdraw from the emergency fund, pay yourself back based on a predetermined schedule as you would any other bill. Discipline yourself to use this money only for real emergencies (e.g., car repairs, sickness, etc.). Keep this money liquid in cash equivalents such as a savings account, money market mutual fund or short-term CD. It might take a few months to a year to accumulate an adequate reserve. The key is to get started now and save regularly to accomplish this goal.

  • Power-pay your debt. Making "power payments" is a method to systematically put you on the path to being debt free. A power payment is an enhanced payment to a particular creditor. As soon as one debt is totally repaid, the monthly payment from that account is applied to another debt. For example, if you owe eight creditors and one is repaid, the previous payment to the fully paid creditor is added on to the payment sent to one of the remaining seven creditors so that debt repayment is accelerated. Money from paid-off accounts continues to be reallocated to repay other debts at progressively accelerated rates until eventually all debts are paid. The result can be hundreds, even thousands, of dollars saved on interest payments and months or years earlier repayment. Better still, there is no additional monthly cost. You continue to make the same total amount of payments each month. The payments are just reallocated differently as various creditors are repaid. You can do a powerpay calculation online at

  • Perform an annual financial checkup. Periodic financial checkups are as important as a routine physical exam to identify problems and potential remedies. A helpful self-assessment tool is Rutgers Cooperative Extension's online Financial Fitness Quiz at

    Lynn Little is a family and consumer sciences educator with University of Maryland Cooperative Extension in Washington County.

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