Among New Year’s resolutions, exercising more and saving more money rank as two of the most popular goals for Americans.
Just like you exercise to keep your body healthy, it is equally important to practice smart financial planning to achieve financial well-being. Financial health means you exercise control over your day-to-day finances, can endure an economic shock, are on track toward your financial and retirement goals, and can enjoy the freedom to make choices that help you enjoy life.
If you’re one of the millions of Americans seeking to shore up your financial health (and keep your New Year’s resolution), consider following these six tips.
1. Assess Your Income and Spending
If you aren’t already doing so, now is an excellent time to get serious about monitoring your income and spending. Assessing your income and spending may be as simple as consistently plugging that data into a spreadsheet or turning on an app to do the tracking for you.
Regularly reviewing the money that’s coming in and going out provides an accurate picture of your finances. You might find out that you’re like other average adult Americans in the U.S.—who spend almost $18,000 a year on nonessentials, according to USA Today.
2. Start an Emergency Fund
What if you stopped spending on nonessentials and started contributing to an emergency fund? As the year 2020 demonstrated, life can take dramatic and unexpected turns. That’s why it’s critical to set up an emergency fund. Money in the fund can be put toward unforeseen circumstances, like losing your job or being hit with surprise medical situations.
Experts generally suggest that your emergency fund contain enough money to cover three to six months’ worth of living expenses. Basically, an emergency fund can help you maintain long-term financial stability.
3. Reduce Your Debt
Committing to lowering the amount of debt you have—particularly high-interest debt—can pay big dividends. One area to examine is your credit card debt. For example, if you have a credit card with an interest rate of 16.9% but don’t pay the balance in full each month, the interest charges can add up quickly. That leaves you less money for your kids’ college fund, your IRA, or your other financial priorities.
Here’s a statistic that may motivate you to slash what you owe: In 2020, the Experian credit bureau reported that average consumer debt in the U.S. stood at nearly $90,500.
4. Shop Around for Loans
If you’re in the market for a home, auto, or personal loan, don’t settle for the first offer you come across. Instead, compare products from at least three lenders to ensure that you’re getting the lowest interest rate and fees. Comparison shopping can potentially save you hundreds or even thousands of dollars when you’re borrowing money.
5. Prepare for Retirement
Numerous surveys and studies show that millions of Americans are ill-equipped for retirement. For instance, 71% of Americans between 45 and 64 years old surveyed in 2020 by MoneyRates.com said they had not projected how long their money would last during retirement.
To set yourself up for a comfortable retirement, experts recommend coming up with a retirement plan. Financial services provider Principal outlines these five steps for creating a plan:
- Figure out how much money you may need in retirement.
- Allocate at least 10% of your income for retirement. This may include contributions to an IRA or an employer-sponsored retirement plan.
- Calculate how much you’ll be drawing from Social Security.
- Fill the gaps in retirement savings. If you realize you’ll be short when it comes to the money you can tap for retirement, look at options like maxing out contributions to your IRA or employer-sponsored retirement plan.
- Review your retirement plan once or twice a year.
Whatever you do, don’t put all of your retirement eggs into the Social Security basket. Social Security is meant to replace only 40% of your income. Plus, the program funds are set to be depleted by 2035, according to AARP.
6. Put Your Tax Refund Toward Financial Goals
Apart from your paycheck, a tax refund may be the biggest check you receive throughout the year. Before that money appears in your bank account, decide how you’re going to spend it. For instance, you may want to beef up contributions to an IRA with your tax refund rather than spending the cash on material items that will break, fade, or fall out of style. And financial health? That’s always in fashion.