How has 2019 been financially speaking? Did you find yourself struggling to make ends meet in the middle of the month? Did you find yourself in financial situations that a little bit of preparation would have fixed?
Maybe, you want to improve your financial situation or even make better investments. While resolutions are made every new year, it's the money moves that can make (or break) your ability to turn your other goals into reality. For instance, you need to have your finances on point to travel more, work out, make new friends, or even buy a new car.
The good thing is that 2020 is a completely new slate for your financial situation, and you can plan for it in the right way. While you may have a long-term financial plan, the short-term structures that you develop will help you increase the chances of fulfilling your plans.
Here are a few things to add to 2020’s New Year financial resolutions.
1. Embrace the 50/30/20 rule
There are a lot of people who earn high incomes, but still tend to find themselves in financial fixes. It all trickles down to one question: how do you budget your income? To gain control of your expenses, you need to embrace the 50/30/20 rule of budgeting.
50% of your income for needs
50% of your income should go into your needs. These are things that need to be paid after every month or pay period. They might include minimal payments for mortgage, utility bills, insurance, healthcare, groceries, and car payments. If you find out that you are spending more than half of your after-tax income on the necessary bills, it means that you might be living beyond your means. It might pay to look for cheaper alternatives to your needs. For instance, you can look for ways to reduce your monthly electric bills and conserve water.
30% of your income for wants
30% of your income should go into your wants- things that you do not necessarily need to have each and every month. These can be movies, events, shopping for handbags, vacations, and the latest electronic gadgets. Such items are optional but still necessary to keep you happy. However, you need to limit the amount that you spend on your wants. For instance, you can cook from home instead of going out, or watch your favorite team on TV instead of buying tickets to the game.
20% of your income for savings
The remaining 20% should go into your savings. Ideally, it is wise to have an emergency fund that can help you survive for at least three months, covering all the expenses. Such savings can be vital in ensuring you remain okay in case you lose your job or face a crisis. You can also put these savings into retirement plans, investments, or IRA contributions.
Remember, you will need to talk about your budget with your family to ensure that you are on the same page. The goal is to work collectively in lowering your monthly spending. It might also pay to set milestones, as part of your New Year financial resolutions, to track your savings and any progress.
2. Pay down debt (as much as possible)
Debt can hugely impact on your purchasing power, as well as how you make life decisions. In case you miss debt payments, or get into too much debt, the chances are that this will affect your credit score. With a sub-par score, it might be tough to get more credit, land a great job, or even find a great place to live. Luckily, if you have a lot of debt to deal with, it can be pretty easy to prioritize debt repayment. You should:
Organize your debt first
You should know all the information concerning the debt you owe. This includes details like:
- The amount owed
- The interest rate/APR
- Minimum payments allowed
- Payment due dates
You can easily get all this information from the statements that lenders typically send. If you cannot get hold of this information, it might be better to call the lenders’ offices to access it. At the very least, know about the balance and the interest rates owed for every debt before setting an ad hoc budget.
Prioritizing interest vs. balance
Interest rates can tend to have a huge impact on the total amount you pay for specific debts. It might pay to settle the higher interest debts first before moving on to the rest of your debt. While this ensures that you can save money by paying down the accruing interest, it doesn’t help in dealing with the psychological impact of debt.
Prioritizing the low balance debts, on the other hand, takes into account the emotional experience of debt. With every small win, you can get more motivated to pay the larger debt. If you think that it will be easier to start with the higher balances, prioritize the bigger debts then.
Make the minimum payments
Ideally, these two methods assume that you have already made the minimum payments. Any extra cash you want to use to settle the debt will follow the method of your choice. If you feel that your current financial situation doesn’t allow you to pay down your debt on time while catering to your expenses comfortably, you can always contact your creditors. You can negotiate new and comfortable payment terms.
3. Protect your paycheck with disability insurance
A quarter of Americans live with a disability. Although most Americans worry about their financial future, a good number pass on disability insurance. Sure, employers offer short-term disability insurance, but this will only cover the lost wages arising from injuries that affect your ability to continue working on for less than six months.
If a long-term injury affects you, you might find yourself out of work for more than a year. This will most likely not be covered by the short-term disability insurance provided by your company. Other than the lost income, this period can lead to you spending a lot of cash trying to take care of your injuries. Long-term disability insurance is a great choice as a part of your New Year financial resolutions for 2020.
In case you get injured, the insurance will ensure that you get paid a percentage of your salary per month. This is typically a preset amount, which is normally between 50% and 70%. Even if you are self-employed, disability insurance can provide you with something to lean on in case disability makes it tough to go on with your business. Different policies will offer different perks; it is essential to read in between the lines to pick the policy that fits you best.
4. Find ways to earn passive income
A passive income lets go of the age-old idea that you have to exchange your time for money. You can get to enjoy a secondary source of income without requiring you to spend as much time and effort as you do on your ordinary job. However, it is unwise to assume that a passive income is something you can earn in your sleep as it also requires some concentration to launch. Some great passive income ideas are:
- Working as an affiliate marketer
- Freelance writing
- Selling eBooks
- Investing in stock
- Investing in real estate
- Selling online courses
- Renting out an Airbnb
- Building an app
Regardless of the path you choose, you will need to understand your customers for you to fulfill this part of your New Year financial resolutions. Ideally, you should know their pain points and look for ways to understand what makes them tick. Grouping customers in demographics and buyer personas can be wise as it allows you to customize your products or services to their needs. For instance, if you are selling online courses, you can segment the payment for the courses into parts that command different purchase prices with different value offerings.
You should also invest time in creating strong relationships in the industries your passive income is based. For instance, affiliate marketing will be a great source of passive income if you can manage to get in touch with companies offering profitable affiliate marketing opportunities. Lastly, be patient with your customers and stay consistent in your messaging. In due time, passive income is bound to yield the fruits you desire.
5. Improve your credit score
Do you have plans to own a car or a home in the future? Without a great credit score, it might be tough to get a good rate as you approach lenders for loans. Ideally, your credit score proves to lenders that you are a responsible borrower, and the chances are that they will get back their money. As mentioned earlier, a great score will also make it easy to find elusive jobs and apartments in places where the competition for both is quite steep.
However, improving your credit score will require you to put in the work. You will need to:
- Pay your bills and debts on time
- Keep old credit card accounts open
- Use a small fraction of your debt limit
- Challenge mistakes on your credit card report
- Avoid hard inquiries
- Negotiate with credit lenders if you find it tough to meet the minimum payments for your debt
Ideally, credit scores are calculated using five factors- your credit history (amounts to 35% of the entire score), the amount owed (30%), credit history length (15%), credit mix (10%), and new credit (10%). The idea is to look for ways to turn all these aspects of your credit score to favor you.
Your New Year financial resolutions for 2020 should set you up for financial freedom for the next decade. All you need is a little discipline combined with a few wins to fulfill your long term financial plans. With the above goals, you can get steps closer to turning your dreams into a reality, while having some financial security. Since the future isn’t set in stone, working with the financial situation you have today can help you be ready for tomorrow’s challenges.
Jack Wolstenholm is the head of content at Breeze.
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