According to The Washington Post:
Every year, you make a promise to yourself to get out of debt or finally build a decent emergency fund.
Or maybe you’ve resolved to spend less or save more for retirement.
You set a goal.
Then life gets in the way and your financial resolution is derailed. You feel like a failure, so you stop even trying. And it’s only March.
The problem isn’t that you didn’t have enough willpower. You probably didn’t have a plan, which starts with knowing where you stand.
According to Bankrate, the top 2022 financial goals for U.S. adults are paying down debt, building an emergency fund, budgeting better, boosting retirement savings and investing more money.
Here’s advice on how to stick to your goals:
Where should I start in creating a plan to pay down my debt?
Say your debt amount aloud.
One of the first things I do when helping folks struggling with this resolution is to get them to say out loud how much debt they think they have. Nearly everyone balks at this request, because they don’t know the total or they are embarrassed. It’s not enough to write it down. Saying the number out loud does something to folks. It leaves an impression of the urgency to pay down the debt. (Try it, and send me a tweet or video on Twitter — @SingletaryM.)
Next, make sure you are certain of everything you owe. Pull your credit reports from all three credit bureaus — Equifax, Experian and TransUnion. The bureaus have set up a centralized website at annualcreditreport.com so you can order your free annual reports in one place. You can also call 877-322-8228.
Federal law gives you the right to a free copy of your credit report every 12 months. Because of the pandemic, the bureaus are allowing everyone in the United States to get a free credit report each week through April 20.
Finally, the method I’ve found most effective in tackling debt is to list what you owe, starting with the smallest balance. I call this strategy the “debt dash.” In addition to your regular payment, take any extra funds and apply them to the principal of the smallest debt. Once you’ve knocked off the top debt, take all that money and move on to the next one on your list, and so on. If two debts are about the same amount, the one with the higher interest rate should come first.
The logical-mathematical method might suggest you go after debt with the highest interest rate first. But there’s more to debt reduction than logic. You have to factor in human behavior.
I’ve found that when people are able to reduce the list of debts quickly because they are attacking the ones with the lowest balance, they stick to this resolution. They also speed up their debt reduction, and this, in turn, results in less interest paid overall.
It’s all about the momentum in this method.
What’s the best way to save for a financial emergency?
When trying to build an emergency fund, it’s best to set it and forget it.
Set it up so that there’s a direct deposit from your paycheck to a bank account for your emergency funds. I suggest it be a different financial institution from the one where you keep the account to pay your bills. The separation usually results in less temptation to transfer funds into the household account to make up for overspending.
If your employer doesn’t allow split deposits or you’re self-employed, you’ll have to set up a system to make the automatic deposits yourself. You could schedule regular transfers from your checking account into a savings account at the same institution. The point is to make paying yourself feel like a bill that needs to be paid every time you get a paycheck.
How do I stick to a spending plan?
In response to a column about budgeting, a reader once wrote, “My financial motto has always been: I save where I can so I can spend where I want.”
I’m all about telling yourself the truth. Budgeting better or controlling your spending starts with really being honest with yourself. Yes, you are eating out more than you think. No, sales don’t save you money, because you’re still spending.
Just to get an idea of how much you spend, track your spending for a month. Get a little notebook and capture all the money going out — yes, even where you spent that $20 you took out of the ATM. So much of our spending is unconscious. Where you see waste, redirect that money to other goals, such as building your emergency fund or paying off debt.
By the way, I don’t have a recommendation for a cool budgeting app. They help, of course. But it’s not the tool that makes the difference. It’s your motivation to do better that matters. An expensive exercise bike is just a clothes hanger unless you have resolved to get in shape.
How can I save more for retirement?
Again, here’s where automation can work in your favor. The first of the year is a good time to look at your retirement savings percentage. What percentage of your income did you allocate to invest for retirement in your 401 (k) or similar workplace plan?
If you’re a new employee, your employer may have started you at 3 percent. For 2022, pick up the pace and perhaps move that percentage up to 5 percent. At the very least, if you can, put in enough money to take advantage of any matching contributions.
Here’s some incentive for you. Workers who become 401(k) millionaires do so in part because they contribute at least 15 percent to their workplace plan, a percentage recommended by Fidelity Investments. This might include a combination of what they’re putting in and a matching contribution from their employer.
Even if you don’t have a 401(k), you can set up a traditional individual retirement account, which allows you to invest pretax income toward investments that grow tax-deferred. You can also set up a Roth IRA. You fund it with after-tax money, but your withdrawals are tax-free.
I have extra money. Should I invest it?
With banks paying a pitiful amount of interest on savings accounts, you may be wondering how to grow your non-emergency-fund money. Outside a retirement account, you have many choices to invest.
I suggest you go through the free “Smart Investing Courses” offered by the Financial Industry Regulatory Authority (Finra). The six modules provide basic information on things such as setting an investment goal, understanding risk and return and identifying fees and expenses.
Another good source for investing basics is the North American Securities Administrators Association (NASAA). At nasaa.org, click the link for “Investor Education.” Then start with the link for “What type of investor are you?”
If you have some extra money, you can invest and earn enough money to buy a car with cash or make a down payment on a home. But you can just as easily lose a lot of money. To avoid scams and speculative or inappropriate investments, do some research.