If your goals for the new year include getting a better handle on your finances, your first step should be simplification. Simplifying your finances will make sticking to a budget, paying off debt, buying a home, saving for retirement or any other financial goal easier to accomplish. Focus on these four areas to get your finances under control and on track in 2016.
When we bought our home two years ago, I realized just how many bank accounts we’d collected. Our list included a joint checking account at one bank and separate savings and checking accounts at two more banks from before we were married. Needless to say, gathering copies of our bank statements for the mortgage application was more time consuming than it should have been. If you have accounts spread across several banks, consolidate to one checking and one savings account. If you use separate savings accounts for different objectives, your bank may offer sub-accounts that let you allocate savings into different buckets while retaining the convenience of a single bank.
Many people change employers several times over the course of their career and leave a trail of 401(k) plans as they go. Roll all of your old 401(k) balances into one IRA. There are many reasons to roll your retirement accounts out of your former employer’s plan, not the least of which is simplicity. At some point, you may need to provide quarterly statements for a mortgage application or start thinking about taking Required Minimum Distributions. I’ve heard stories of people reaching age 70½ with retirement accounts spread over a dozen or more old 401(k) and IRA accounts. Maintain a 401(k) plan with your current employer to take advantage of matching contributions but have one IRA account to act as a holding tank, rolling in funds as you switch jobs.
Pay Off Debt
If you’re carrying balances on more than a couple credit cards, consolidate to just one or two cards with the lowest rates and best rewards. I used to be guilty of signing up for a store card at every store I visited just to get an occasional discount. Not only do store cards often come with higher interest rates that will negate any discounts if you carry a balance from month-to-month, but having more cards means more due dates, interest rates and annual fees.
I’m a big fan of the debt snowball method for paying off credit card balances. To preserve your credit score, don’t close the accounts as soon as they are paid off. Instead, cut the card up but keep the account open. If you really want to close accounts, close one, then wait six months before closing another. Spreading out the decrease in your total available credit over the course of several months won’t do as much damage as a sudden, significant reduction.
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Automate everything: credit card payments, loan payments, monthly utilities, etc. Having your regular monthly payments automated will help you avoid penalties – as long as you have enough in the bank to cover the payment. Although the Credit CARD Act of 2009 capped credit card late fees for a first offense to $27 (down from an average of $39 prior to the Act), a late payment can still earn you a higher penalty interest rate and penalties are only capped if the borrower has not “engaged in repeat violations.”
If you are concerned that automating payments will result in less oversight, consider that most monthly expenses are similar from month to month. Many banks will also send you an email whenever an automated draft is requested from your account. If a credit card or utility payment is suddenly larger than normal, you can investigate.
While you’re at it, automate saving. Set up monthly transfers to savings or your retirement accounts on pay day. With the money going out before you have a chance to see it, you won’t miss it and there’s less chance you’ll forget to save.
Take Advantage of Technology
For better control over your finances, use free online tools such as Mint or Personal Capital. Both services gather all of your financial information in one place and allow you to securely log in from a desktop, tablet, or mobile device to set a budget, track your cash, and access customized calculators and tips for reaching your financial goals.
Use Outlook, iCal, or Google Calendar to set up reminders for things that aren’t automated, such as quarterly estimated tax payments or when discounts and promotional rates expire so you can continue to get good deals or shop around.
Go paperless whenever possible for monthly bills. Account statements can be accessed online. Paperless statements are not only better for the environment, they reduce the risk of identity theft and save you time sorting or shredding statements that you’ll likely never look at again.