2018 New Year Resolutions

It’s that time of the year when many of us take stock of how the year went, our accomplishments as well as our challenges, and determine a set of new resolutions for the coming New Year. Some of the more common resolutions range from sticking to an exercise regime to spending less time on your phone, to giving more time to those in need.  Boosting your financial health is another common area of focus for many people.

Here are 5 areas of focus you should consider if you’re one of the many who is determined to boost your financial health in 2018.

  1. Pay off Debt

As a whole, American consumers carry a lot of debt.  A recent report from the New York Federal Reserve shared that  U.S. household debt balances totaled almost $13 trillion in March 2017 and the average U.S. household carries about $137,000 in debt.

By any measure that’s a lot of debt, but be thoughtful as not all debt is the same in terms of its impact on your financial health.  Taking on debt to buy a home may actually help one accumulate wealth over the long run if that property appreciates in value as you pay off the mortgage.  Similarly, acquiring advanced education funded by student loans can be a wise investment as it tends to result in higher income levels as illustrated in the table below.

Education Level Average Annual Salary
No high school degree $25,636
High school degree $35,256
Bachelor degree $59,124
Master degree $69,732

Source: Smartasset.com

If you are carrying debt, take some time to evaluate how much you have, figure out the type of debt you are carrying and determine if you can allocate any extra funds to reduce that debt.  You should consider focusing on debt with higher interest rate charges such as retail and credit card balances.

There are hundreds of free budget planning tools available on the Internet that can help you through this process. Investigate, read reviews and ask friends and family on their experiences before signing up with one of these providers.

  1. Create or increase a “rainy day” fund aka an emergency fund

We all know from experience that life sometimes throws a curve ball and effectively handling that curveball is a lot easier if you are prepared.  An unexpected car repair, an unanticipated medical situation or a loss of employment can happen to any of us, and they all require some degree of reserves to address.

Do you have a “rainy day” fund you can tap into if necessary?

If not, you are not alone.  Approximately 26% of adults have no savings set aside for emergencies and an estimated 38 million households in the U.S.  live paycheck to paycheck — meaning they spend every penny of their paychecks.  In many cases, these individuals end up relying on credit to cover unexpected expenses, which may add to already high debt levels and negatively impact their access to affordable credit.

Most financial planning professionals recommend an emergency fund that covers three to six months of average monthly expenses.  Don’t turn a blind eye to this action item because creating a six-month emergency fund is just simply not feasible for you at this time.  Start smaller if you need to – even a $500 emergency fund can give some peace of mind that you have some level of resources if needed.

  1. Save for retirement

It can be easy to put off planning for retirement, especially if you are younger and retirement seems so far off into the future. Being prepared for retirement is a major concern for a majority of Americans as 59% indicate that running out of money is their number one fear, yet 36% of Americans have yet to start saving for their “golden years”.

And relying on Social Security is a risky bet as the average monthly retirement benefit was recently around $1,300 – an amount not likely to cover all your monthly expenses and could actually decrease in the future as more of the U.S. population ages/lives longer and Social Security funds become more depleted.

Many people do participate in a 401(k), which is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account. As an added benefit, many employers match up to a certain % of the amount saved by the individual.

Here are the median 401(k) balances by age group for U.S. consumers (“median” means that 50% of all retirement savers have less than this amount saved and 50% have balances higher than this median amount).  As you can see, the median amounts are relatively low if you consider that individuals may well live 10, 15 or 20+ years after retiring.

Age Group Median 401(k) Balance
< 25 $1,385
25-34 $8,363
35-44 $23,944
45-54 $46,200
55-64 $71,579
65+ $68,588

Source: Vanguard’s 2016 How America Saves report

A key strategy for building a larger retirement nest egg is to start saving as early as possible.  The “magic” of compounding interest accelerates the growth of your retirement savings.

  • For example, assume Susan starts saving $1,000 a month from the time she turned 25 until she turned 35. Then she stopped saving but left her money in the investment account where it continued to accrue at a seven percent rate until she retired at age 65.
  • Assume that Matt only started his retirement investing at age 45 – also investing $1,000 per month for 10 years. He also left his money to accrue at a seven percent rate until he retired at age 65.
  • While they both invested $120,000 over a 10 year period with a 7% return, the difference in their ending balances (at age 65) is quite amazing. Susan’s ending balance would be $1,444,969 while Matt’s is $373,407. While $373,000 is a lot of money, the discipline to start retirement investing earlier in your life can have substantial benefits (a 5 times greater benefit in this case).

The hardest part about saving for retirement is getting started.  It’s one of those activities you just need to do.  If you work for a company that has a 401(k) plan, your employer makes it simple by taking the amount you want to save out of your paycheck, pre-tax, and auto-investing it per your investment selection(s). Many companies will also match your investment amount (up to a certain percentage) –  that’s free money that you should never pass up!

If you don’t have a 401(k) option, you can consider opening an IRA account yourself (reputable investment companies offer IRA accounts and can educate you on how they work, restrictions and rules).

  1. Check credit reports

Much of the U.S. consumer economy is driven by our credit system and most people need to get financing to purchase a home, automobile and other consumer goods.  In addition, using a credit card can provide conveniences, including easy-to-conduct online shopping, detailed reporting of purchases, support for transaction dispute investigation, liability limitations in the case of fraudulent purchases, etc.

In the U.S. there are three main credit reporting agencies (Equifax, Experian and TransUnion) that house and maintain credit reports on hundreds of millions of U.S. individuals.  They collect information about credit-related activity such as your credit obligations, credit-related public records and credit inquiries and collections activity.  Lenders will typically pull an individual’s credit report whenever a person is seeking new credit and a lender will use the credit report information to help in its credit granting evaluation.

As such, it’s very important that everyone periodically check their credit reports to ensure the data is being accurately reported.  The easiest way to do this is to visit www.annualcreditreport.com and get access to your credit reports.  The site enables all U.S. consumers to access their credit reports annually at no charge.  Once you access your reports, evaluate them carefully for reporting errors and follow the dispute resolution instructions should you find inaccurately reported information.  The credit reporting agency has 30 days to investigate and resolve the dispute.

There are also many other websites that offer access to credit reports and/or monitor credit reports for changes – often for a fee.  Just be sure to evaluate the legitimacy of any site before signing up for its services.

  1. Review and Monitor Your FICO® Scores

Once you have determined that your credit reports are error-free, you can turn your attention to your FICO® Scores.  FICO® Scores are used in more than 90% of lending decisions, so chances are high that the lender is also requesting a FICO® Score when accessing your credit report.  Having a higher FICO® Score can make access to credit easier and more affordable.

For example, assume you are trying to purchase a home and need to get a $270,000 30-year mortgage loan, and your FICO® Score is 652.  Based on the interest rate by FICO® Score interval information in the table below, you can see how interest rates decrease as scores increases.

FICO® Score APR Monthly Payment Total Interest Paid
760-850 3.615% $1,230 $172,735
700-759 3.837% $1,264 $184,960
680-699 4.014% $1,291 $194,833
660-679 4.228% $1,325 $206,915
640-659 4.658% $1,394 $231,665
620-639 5.204% $1,483 $263,976

Source: https://www.myfico.com/credit-education/calculators/loan-savings-calculator/

  • At a FICO® Score of 652, the interest rate would be 4.658% with a monthly payment of $1,394.
  • If the score could be increased to the low 700s, for example, the monthly payment amount could be reduced by $130 – equating to nearly $47,000 in interest over the life of the loan!

And – by the way, that savings of $130 per month could be used to pay down other debt or build up your rainy day fund or contributed to your retirement savings!

FICO® Scores are dynamic – moving up or down as the underlying information in your credit report changes.  How frequently your scores change and by how much depends on several factors, including the overall composition of your credit profile, in addition to what new underlying reported information is being considered by the scores.

To get started, you can access your FICO® Scores and credit reports at myFICO.com.  Once your order is complete, evaluate and understand the top factors indicating why your scores are not higher, and focus your credit behaviors to address those factors.  Or play with the FICO Score Simulator feature at myFICO.com, which enables you to run “what if” scenarios, such as “what happens to my score if I pay $xxx of my credit card balances.”

Be sure to monitor and track your progress as you focus on increasing your FICO Scores over time. Good luck on your journey to better managing your financial health, and best wishes for a healthy, happy and prosperous 2018!

 

Some of the information shared in this blog was sourced from the following sites:

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Tom Quinn

Tom Quinn is the Vice President of Business Development for myFICO and has over 25 years of experience working with consumers, regulators, and lenders regarding credit related questions and initiatives.