December 30, 2004  Email this  Print this
 License or reprint this articleSTARTING OUT
Five Financial Resolutions for the New Year
by Erin Burt  Year after year I make a resolution to get in shape. I've bought books, tapes, and videos in hopes of devising an exercise plan that will have me looking like Jennifer Garner in a matter of weeks. I even moved into an apartment complex with a workout room so I couldn't blame my failure to get to the gym on traffic or weather. But come January 31, my tennis shoes are always buried in the back of my closet, my jogging pants still have their tags on and I'm back on the couch in front of the tube.
Most of you probably have similar results with your New Year's delusions, er, resolutions. You have the best of intentions, but seem to fall short. But here are five goals that make it easy to stay motivated (and you won't have to miss your favorite TV show). With our tips and tools, you just might meet your goals this year.
Start saving for a house
If you long for a home to call your own, make 2005 the year you stop dreaming and start acting. The beauty of this resolution is that it's easy to stay focused -- you're constantly reminded of your goal every time you write your rent check.
First, use our calculator to figure out if buying a home makes financial sense for your situation. If you think you may need to relocate to further your career or you aren't sure where you want to settle down, renting may still be your best option. (See Rent or Buy? for more information.)
But whether you're ready to move into a house now or five years down the road, you can start saving to make your dream a reality when the time is right.
Shooting for a down payment of 20% is a good idea and the only way to avoid private mortgage insurance. This insurance protects the lender, but you pay the premiums. If you default, the bank receives the pay off. So unlike the principal, which is money in your pocket, and the interest, which is tax-deductible, PMI is nothing more than an added cost.
But you'd have to shell out $36,000 if you want to put 20% down on a $180,000 mortgage, and there are also inspections, appraisals, document filing fees and other closing costs to consider. Don't panic -- you can get into a house sooner for a much more doable amount, and may even be able to finance the down payment with a "piggyback" loan to skip the PMI. See The Lowdown on No-Down Home Loans to find out how.
Once you set a savings target, now comes the hard part: Actually saving the money. But there are some steps you can take to make this easier too.
First off, resolve to pay yourself first. Don't wait until the end of the month, after all the bills are paid, to decide how much to save and how much you'll need for entertainment, dining out, etc. Guess what, savings will always get the short shrift.
If you set aside a fixed amount from your paycheck as soon as you get it, you'll stand a greater chance of reaching your goal.
Put the money into a special account reserved exclusively for your house. That way, you can easily keep track of your progress and you won't be tempted to dip into it.
If money is tight, re-evaluate your spending to see if you can cut back in some areas.
Married? Be sure your spouse is on the same page. You can split the savings responsibility, and not run into conflicts about overspending.
Spell safety F-D-I-C. Don't even think about putting your money in stocks or stock mutual funds if you think you'll spend it in the next three years. Instead, check out ING's Orange Savings Account which pays 2.35% interest or consider FDIC-insured CDs which pay higher rates but lock up your money for a set period of time.
When you're ready to buy, check out our Home Buyer's Survival Kit for information on choosing a broker, scouting properties and closing the deal.
Put away your credit cards
Resolve this year to spend only the money you have. Credit cards are nice for their convenience, but unless you're disciplined enough to pay off your balance each month, they're not worth the cost.
Let's say, for example, that you carry a balance of $700 on a card charging 18% interest. If you pay $25 each month toward your bill, it'll take you three years to pay it off and cost you an extra $286 in interest. Pay only the minimum required, and it'll take ten years and cost $665 extra. (See what it'll take to pay off your credit cards.) The thought of paying for something twice over the next decade should be enough to motivate you to evaluate your credit habits.
The best way to avoid the eternal credit card bill is to not get deeply in debt in the first place. Clark Howard, consumer advocate and radio talk show host, says credit cards should be used for safety and emergencies only. When you head to the mall, leave them at home. In fact, Howard suggests putting your cards on ice -- literally. "Put them in a bag with water and throw it in the freezer. By the time it melts and you can get to the card, the urge to use the card will have passed," he says.
Or opt for cash or a debit card which takes money directly out of your checking account. But if you must use your credit card, deduct the amount on your checkbook register. That way, you'll ensure you have enough money in your bank account to pay the bill when it comes due.
Ask for a raise
Ready to supersize your paycheck in 2005? No matter how much you think you deserve a raise, you'll probably have to prove it to your supervisor.
Sit down and make a list of your accomplishments to illustrate your value to the company and your department. And be specific: Show how much money the company made on extra sales you generated; highlight how much money and hassle you saved the firm by finishing an assignment ahead of schedule; demonstrate how you took the lead on a project and turned it in on time despite unforeseen obstacles.
Find out how your salary compares to others in your industry with your level of experience to get a ballpark figure of what you're worth. Then, decide what you want. If your salary is at the low end for your position, shoot for mid-range. If you're near the top, find out if you can take on extra responsibilities to boost your pay further -- or decide if it's time to look for another position entirely.
And remember, a raise doesn't have to come with dollar signs. Consider negotiating your benefits and perks, such as more vacation time, flexible work hours, stock options or tuition reimbursement.
A good time to talk about your pay is during your annual review with your supervisor. But if that's a ways off, look for other opportunities to bring up the subject. You might want meet with your boss after a stellar performance on a project, or after you've agreed to take on extra responsibilities. (You don't want to give your boss a chance to develop amnesia.)
With your list of accomplishments in hand, approach the topic professionally -- like two business partners trying to reach a compromise. Don't be cocky and don't compare yourself to co-workers -- stick to the field in general. Oh, and don't threaten to quit unless you really mean it.
Start investing
If you're one of those people who think you need to be rich to invest, turn that thought upside down: You need to invest to be rich.
For example, if a 25-year-old invested $200 a month, and earned an average 10% return on her investment, she'd have $1.3 million by the time she turned 65.
Not bad, eh? The earlier you start investing the more time your money has to grow. And you can always start out small at first and gradually increase your deposits as your salary grows. The key is a little trick called dollar-cost averaging: invest a set amount on a regular basis, say monthly or quarterly, no matter what the market's doing. That way, you'll smooth out the volatility of the market over time. (See how regular deposits can boost your investments.)
Of course, the best place to start investing is in your employer's 401(k) -- especially if it offers a match on your contributions. To learn more, see Save Now, Retire Rich.
If you don't have a retirement plan at work, consider opening a Roth IRA and stocking it with Mutual funds. These are a good way to dip your toe into investing because you can spread your risk among several stocks (or bonds, or countries) within a single fund. Consider these three starter funds that offer low minimum investments.
Cover your assets
Here's a resolution that won't take lots of planning or months to pull off: Get renter's insurance. Nearly two-thirds of renters don't have any protection for their belongings in case of theft, fire or other disaster. But unless you have enough money saved to replace everything you own -- clothes, furniture, computer, entertainment system, microwave, etc. -- it's definitely worth the cost.
No matter how paltry your salary, you can probably scrape enough together to buy a policy -- expect to pay $150 to $250 a year, or $12 to $21 a month. You may pay more or less depending on your neighborhood and level of coverage. Check with your auto insurer to see if you can get a discount for having more than one policy with the company. Or get quotes from several companies online at InsWeb.com.
And speaking of auto insurance, it wouldn't hurt to make sure you're getting the coverage you need for the best price. See Tune up Your Auto Policy for tips.
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GETTING STARTED