By Jeff Binkley
Many financial resolutions made for New Year’s never make it past the thought. That’s why I’m going to suggest you make the most impactful one first.
Build an emergency fund first.
An emergency fund is just that. It’s money set aside in case an emergency happens. Its establishment provides the foundation for any other financial resolution to build upon. An emergency fund is typically one- or two-months’ worth of expenses set aside in cash. A recent survey (Forbes.com, Dec. 1, 2023) stated that just over 40% (40.7%) of Americans are living paycheck to paycheck and that three quarters of those (77%) do not have enough money in emergency savings to cover even one month of their expenses. If you don’t have one in place, forget about all other financial resolutions other than getting that emergency account fully funded.
Pay down or pay off credit cards.
When I establish a financial plan with a client, I like to find ways we can achieve total return for them. If you have credit card debt, one way of achieving total return in your portfolio is to pay it down or off. The average credit card interest rate is now 27.82%, according to Forbes Advisor’s weekly credit card rates report (Dec. 11, 2023). My job has me look for good investment results for my clients. Imagine getting a guaranteed 27.82% rate of return! That’s what paying down your credit cards does for you. Yes, when you’re in debt, specifically credit card debt, money spent toward reducing that debt gives you a rate of return effectively equal to the interest rate of the debt you’re paying off. Guarantee a high rate of return on your money by using it toward paying off those debts.
Contribute (more) to your retirement account.
Finally, but only after your first two resolutions have been met, consider increasing your 401(k) or IRA contributions. These are easy and very effective ways to help ensure the life you lead in retirement is just as fun and fulfilling as the life you lead now.
These are simple resolutions to make and with some discipline, shouldn’t be all that hard to implement. But start with building that emergency fund first. Because just like what happens to the “lose weight” resolution when the boss buys your favorite pizza for the crew, if you don’t have your emergency fund in place, the “pay off credit cards” and “save for retirement” resolutions quickly go out the window when the water heater breaks down or a tire blows out or your kid needs new basketball shoes and has to have the best. Best wishes for the New Year. Now get busy.
