Credit Cards Prepaid Cards Gift Cards Tools

CardHub’s 2014 Money-Saving Resolutions

2014 ResolutionsNew Year’s isn’t just a time for revelry and midnight kissing; it’s also a landmark for new beginnings.  Before the confetti from New Year’s Eve even gets swept up, folks around the world will be busy making promises to themselves and loved ones about how they plan to change their lives for the better in the coming months.  That’s why the gym always seems so crowded in January, while the job market gets flooded with new applicants and fledgling teetotalers lock their liquor cabinets and hide the keys.  New Year’s Resolutions aren’t limited to one’s physical health and career prospects, however.  Financial well-being is a common theme as well, with people often pledging to finally pay off their debt and/or do a better job of budgeting.

With that in mind, we at Card Hub came up with 5 Resolutions for Your Finances in 2013.  Committing to these changes – some of which might surprise you – will help improve your financial situation in the short-term and keep you out of trouble moving forward.  Don’t worry if you’ve had problems adhering to resolutions in the past either; we’ve provided a roadmap of sorts to ensure that you don’t get lost along the path from resolution to end result.  Good luck!

  1. Get Out of Debt Consumers displayed significant improvement in terms of their spending and payment habits during the third quarter of 2013, adding 8% less debt than during Q3 2012 and 27% less relative to Q3 2011. In fact, consumer credit management has improved relative to the prior year in six out of the last seven fiscal quarters. The problem is, we’re still adding debt to our tab – just at a slower pace. We incurred nearly $11.9 billion in new credit card debt during Q3 2013 and are on pace to finish the year with a $33.4 billion net increase. Given how corrosive credit card interest is to investing and retirement planning as well as how vulnerable the lack of an emergency fund makes us to the vicissitudes of the economy, paying off amounts owed should be a major priority in the New Year.

Recommended Approach:

  • Make a Budget:  Solving your debt problems necessitates living within your means, thereby preventing your balances from growing and enabling you to focus on paying down what you already owe.  To do that, you’ll likely have to rethink your definition of a necessity (hint:  a flatscreen TV isn’t one).  We recommend ranking your common monthly expenses in order of importance and eliminating those that you care least about until your expenses are significantly less than your monthly take-home.
  • Adhere to the Island Approach:  You can minimize interest and get the best possible collection of rates and rewards by isolating different types of expenses on individual credit cards, as if they are desert islands.  For example, you should carry any debt you have on one card while using a different card to make everyday purchases (which you should always pay for in full within the respective billing period).  If you’re charged interest on the card you’ve designated for everyday use, you’ll know that you need to cut back. You can use a credit card calculator to identify the best credit cards for each of your unique needs.
  • Treat Debt Like a Snowball:  If you have a few different balances, attribute the majority of your monthly debt payment to the balance with the highest interest rate while only putting the minimum required to stay current toward your other balances.  As you systematically eliminate your most expensive debt, the money you have available for other balances and, eventually, pursuits such as saving for college and retirement will increase like a snowball rolling down a hill.

Ask The Expert:

Richard Serlin – Adjunct Professor of Personal Finance, John and Doris Norton School of Family and Consumer Sciences, University of Arizona

“If your Must-Haves, your monthly fixed expenses, are under 50% of after-tax pay, then saving can pretty much go on auto-pilot. For example, half your money goes to Must-Have necessities. You can then immediately put 20% into savings. And the remaining 30% is for discretionary spending, what Harvard professor Elizabeth Warren calls ‘Wants’. When you run out of money for wants, you stop; they are discretionary, not necessities.

Now, this can be hard with the credit card sitting right there. But the big thing is that if you go to used cars, a less big and fancy house, you don’t have to have granite and wood everything, and so on, then your monthly payments are so much lower (as is your stress). You just have so much breathing room. You can maybe eat out too much, or buy the dress, but still save a lot even with this occasional over-doing.”

  1. Build Excellent Credit – Anyone who has followed the credit card market in recent years understands the value of excellent credit. In an attempt to bolster their business against future economic turmoil, issuers have been offering eye-catching initial rewards bonuses and 0% financing deals to consumers with above-average credit standing. Such cards have the potential to save users $400 to more than $1,000. The importance of a strong credit track record extends far beyond that, however. From mortgage and insurance savings to one’s ability to land certain jobs or rent an apartment, there are a variety of clear-cut benefits that come with responsible credit management.

Recommended Approach:  Exactly how you approach credit building depends on your starting point.  If you’re new to credit or trying to recover from past mistakes, opening a secured credit card is likely your best option.  Anyone who can place a refundable security deposit of at least $200 can get a secured card because the deposit acts as the account’s spending limit and protects the issuer financially.  Secured cards are also indistinguishable from “normal” credit cards on your credit reports, which means that as long as you make on-time payments each month, positive information will flow into your credit reports and you should see credit score gains in a little bit over a year.  Those of you who have already built a bit of credit should certainly follow the same game plan in terms of making on-time payments, but you should also make sure to have 3-4 open credit/loan accounts and minimize debt in order to boost your available credit and expedite the credit building process.

Ask The Expert:

Christopher M. Browning – Assistant Professor, Department of Personal Financial Planning, Texas Tech University

“From a credit building standpoint for someone is worried about overspending there are better options than cutting up cards or closing accounts all together. One of the better options is simply having the credit limit reduced. Credit limits offered on cards are not endorsements for how much individuals can afford to spend. Lowering the limit for someone who is prone to overspend will restrict their ability spend beyond their means, while also making credit available to build the credit score and protect against minor emergencies. Do something as simple as matching the credit limit to available reserves is a practice that will significantly reduce the likelihood of spending beyond one’s means, while also providing beneficial access to credit.”

  1. Improve Your Child’s Financial Literacy:  We essentially have a financial illiteracy epidemic on our hands right now. The events of the past few years have proven how little most of us know about responsible money management, and it seems that our children know even less. I mean, more than 70% of parents say their kids don’t know the basics of personal finance. Some changes to the education system are obviously needed, but education always starts at home, and parents need to give their kids practical experience managing their own money when they reach high school. We recommend giving your child an allowance on a prepaid card and requiring that they pay for some of their own discretionary expenses. Prepaid cards are great financial literacy teaching tools because they can’t be overdrawn and they won’t lead to credit score damage or debt. Once your child masters the prepaid card, you can progress to cash, a checking account, and ultimately a student credit card. Such a program will give your child experience budgeting and making transactions with the major financial products used during financial independence.

Recommended Approach:  The best way to impart financial lessons is through practical experience.  We recommend starting by giving your child his or her allowance on a prepaid card and requiring that they foot some of their own bills (e.g. trips to the movies to start).  A prepaid card makes for a great starter financial product because parents can closely monitor their kids’ spending habits through online account management and kids can’t incur any debt or ruin their credit standing.  After your child masters prepaid card use, we suggest increasing their responsibilities while decreasing the frequency with which you provide their allowance and gradually progressing from providing it in cash to using a checking account and, finally, a student credit card.

Ask The Expert:

Bonnie Meszaros – Associate Director, Center for Economic Education & Entrepreneurship, University of Delaware

“Waiting until college is too late.  As part of a freshman seminar here at the University of Delaware, we teach one session on credit and one on money management.  It is clear that most of the students are unaware of fundamental financial concepts such as the difference between a debit and credit card, the impact of not paying off your credit card bills, and the impact of a low credit score.  I actually think that personal finance needs to be introduced in the elementary grades.   Young children are interested in money and have their own money to spend received from doing chores, allowance, or as gifts.  They make decisions on the use of money, theirs and that of their parents, on a regular basis. Research shows that saving and spending habits are formed early.  [David] Whitebread and [Sue] Bingham looked at studies on how children learn in general and how they learn about money in particular.  They found that the ability to plan ahead and to delay gratification are formed in early childhood. We would never wait to teach math and reading until high school, nor should we wait until then to begin teaching about saving, spending, and goal setting.”

  1. Start an Emergency Fund:  If there’s one lesson we learned from the Great Recession it’s that an emergency fund is extremely important. After all, we’ve defaulted on more than a quarter of a trillion dollars since the beginning of 2009, and that staggering number would be a lot lower if more of us had emergency funds. That’s why when people ask me, ‘which should I do first: pay off my debt or build my emergency fund,’ I always say that establishing an emergency fund should actually be the higher priority. Say, for example, you pay off what you owe and immediately lose your job. If you don’t have an emergency fund, you’ll just fall right back into debt, incur significant credit score damage, and have creditors ranging from your doctor to the cable guy showing up at your door. With that being said, the goal should be to have a nest egg equal to roughly a year’s salary so that you can stay afloat while handling any financial emergency that may pop up.

Recommended Approach:  Ideally, you want a cash reserve equal to about one-year’s salary.  This will obviously take some time to build, which means you should attribute a certain amount of each month’s take home to building your fund until it reaches the requisite value.  Interestingly, having a solid emergency fund should be a higher priority than paying off amounts owed.  Think about it:  If you focus on paying off your debt instead of building an emergency fund, unforeseen circumstances such as job loss will cause you to immediately start falling behind on all of your payments.  You’ll therefore not only find yourself back where you started in terms of debt, but you’ll also incur significant credit score damage and have creditors ranging from your phone company to your landlord coming after you.

Ask The Expert:

Richard Serlin – Adjunct Professor of Personal Finance, John and Doris Norton School of Family and Consumer Sciences, University of Arizona

“A huge benefit of cutting Must-Haves to less than 50% is that if there is a crisis like a job loss, you can weather it without being financially ruined. With Must-Haves of 50%, you can, if necessary, at least for a while, cut back your spending to just 50% of your after-tax pay. If you lose your job, you can usually cover that 50% with just your spouse’s job and unemployment benefits, so you don’t have to perhaps destroy you savings and go into a debt spiral before you’re able to find another job. Unfortunately, in today’s much riskier world, crises are so common. Thus, it’s so important to have your Must-Haves at 50% or less, so you can weather them without financial ruin – or worse.

It’s very good – on top of getting Must-Haves under 50% – to make some saving automatic. Of course, you should max out the automatic 401k withdrawals of your employer. But also, you can have your Vanguard or Fidelity account automatically take out a certain amount of money from your bank account each month.”

  1. Improve Your Health:  There’s actually a strong correlation between your personal health and that of your wallet. Studies show that being overweight or smoking translates to thousands of dollars in additional medical costs over the course of your lifetime, and that doesn’t even speak to lost productivity due to a lack of energy, the added insurance burden, or money wasted on quick-fix health improvement schemes. Mental health is just as important because being happy and in a sound state of mind has positive ramifications throughout your life, particularly in terms of being more efficient at the workplace. We’re obviously not experts in physical or mental health, but we can point out their importance and recommend addressing them in the coming year.

Recommended Approach:  Don’t look for any wisdom in this recommendation, as we have no more expertise in this area than any of you.  So make sure your weight is proportional to your height, eat healthy and balanced meals, exercise regularly, and eliminate bad habits like smoking or excessive drinking.

Ask The Expert:

Arthur B. Markman – Professor of Psychology and Marketing, McCombs School of Business, University of Texas at Austin

“Money problems are consistently rated as one of the biggest sources of stress in people’s lives.  People who do not have money problems are consistently happier than those who do.  The more that people learn to budget and get in a pattern of saving so that they have a financial cushion in case of an emergency, the happier they will be throughout their lives.  The value of financial literacy is the value of happiness.”

 

There you have it:  your roadmap to financial well-being in 2014.  Set your goals, focus on remaining disciplined, and remind yourself of the proverbial pot of gold at the end of their rainbow.  That way, your wallet is the only thing that’ll be fat when next year rolls around!

Previous Divorce and Credit Card Debt: Who Owes What?   2013 Credit Card Landscape Report Next
POST YOUR COMMENT

Our content is intended for general educational purposes and should not be relied upon as the sole basis for managing your finances. Furthermore, the materials on this website do not constitute legal advice and should not be relied upon as such. If you have any legal questions, please consult an attorney. Please let us know if you have any questions or suggestions.