Your choice: Will you celebrate financial freedom in 2013—or continue to suffer from a financial hangover? (Image: ThinkStock)
Some believe that resolutions were made to be broken. I believe they are made to be kept, which is why it’s important to not make too many of them. It’s about focusing on a few key commitments that will lay the foundation for real transformation, not a bunch of unrealistic wishes without a plan to achieve them, whether we’re talking about your relationships, your health, your career, your spiritual development or other areas of your life. When it comes to money, I believe that improving our finances boils down to three basic commitments, no matter who you are or how poor or wealthy you are today. If you’re not willing to keep the following resolutions, you’re just kidding yourself about improving your finances during the year to come:
Resolution: I will not spend more money than I make. When it comes to getting your money right and gaining financial freedom, this is the most important resolution you can keep, regardless of your income. Unfortunately, on average, Americans spend about a dollar and 25 cents for every dollar they earn. How? By not following a spending plan, also known as a budget, and by using credit as a substitute for the cash they don’t have.
Wealth is not a matter of how much you make, but how much you keep. So the person who makes 30,000 dollars a year and manages to save $5,000 of that income by the end of the year, is wealthier than the person who makes 3 million dollars a year, but ends up spending 4 million, creating an additional million dollars in debt and liabilities. That’s how so many individuals with high incomes, such as many pro athletes, end up bankrupt. Living beyond your means leads to financial disaster no matter how big your paycheck is, as the ESPN 30 for 30 documentary “Broke” illustrates.
That’s why you need to make—and keep—a resolution to live within your means in 2013. This starts with adjusting your budget, or creating a new one, to account for all of your monthly income and expenses. If the latter is greater than the former, you only have three options: make more money, cut expenses or some combination of both.
Resolution: I will be debt-free in 2013. If you are among those making this new year’s resolution, congratulations. What’s the best plan of attack? Here are some viable strategies to consider.
One way to go is to focus on paying off your smallest debts first, quickly getting rid of them so that you can apply those payments toward progressively larger debts. For example, you might pay off the $500 credit card balance, then move on to the card with the $900 balance, before focusing on the one with the $2,000 balance. Knocking out the smaller debts quickly can provide you with the positive motivation to attack the larger debts.
Another way to go is to focus on the debts charging the highest interest rates and work your way down to the ones with the lowest. This approach will help you save money on interest payments in the long run. Again, as you eliminate each debt, apply those payments to the remaining debt.
No matter which way you go, always make at least the minimum payments on all outstanding debt, avoiding late fees by always paying on time (ideally three days before they are due). Also, any payment agreements you’ve made with a creditor or debt collection agency should be given priority in your strategy.
Finally, check out The Billion Dollar Challenge at BillionDollarPaydown.com, a national initiative and web site for individuals and groups to collectively pay down one billion dollars in debt.
Resolution: I will pay myself first. This is the first rule of money management, but most of us don’t follow it, and many who do don’t stick to it. Paying yourself first means putting away a percentage of your income, ideally 10 percent, exclusively for long-term savings and investment goals. This “payment” should be treated like your mortgage, rent, utility or any other bill, paid every month, no matter what. That means training yourself and building your budget to live on 90 percent of your income.
So what are you paying yourself for? Your first goal is to accumulate savings equal to at least 9 months of your annual household budget, to be spent only in case of loss or interruption of income (for example, due to being laid off or an extended illness). After you’ve reached that savings objective, put additional self-payments towards long-term goals such as a down payment on a home, capital to start a business and boosting retirement savings.
Keep this money in an account separate from your main bank accounts, to reduce the temptation to dip into it. Also, pay yourself by automatic deposits from your paychecks—just as income tax, health insurance contributions and other costs are deducted.
If you’re paying down debt, you can reduce your self-payment to 5 percent of your income, building back to 10 percent as you eliminate debt and/or increase your income. Whatever you do, resolve to build payments to yourself into your budget for 2013.