— Many Americans may have little hope that the New Year will ring in positive change for their personal finances. They know they'll be riding out a recession that some economists believe could last at least until next winter. But there are some signs of hope. Financial security is still possible for most.
You may not be able to print more money, like the federal government, in order to get out of your financial troubles. To make ends meet, you need to take ownership of your financial situation and create your own stimulus plan. Your No. 1 New Year's resolution should be to get your money straight.
Here's how to do it:
Track your cash flow
Nearly 40 million adults keep little or no track of where their hard-earned dollars are headed, according to a study by the National Foundation for Credit Counseling Financial Literacy Survey.
The first step in getting on the right financial track is to always know where your money goes. Make a promise to yourself that you will write down every penny you spend for 30 days. That's not a long time — just do from now until the end of January.
Go to the National Foundation for Financial Education's Web site
www.smartaboutmoney.org and download the Tracking Your Expenses worksheet to help you monitor your spending.
You may be amazed at what you are spending and figure out that you need to make some serious adjustments.
Build a budget
As you're tracking your spending, you can put those expenditures into different categories and start to build a budget. Putting yourself on a budget doesn't mean you can't enjoy life. It just may mean you need to take some time to stretch out some purchases. Immediate gratification often leads to spending beyond your means. Ultimately your goal should be to live on last month's income so that you're not living paycheck to paycheck — or worse yet, living on credit — to maintain your lifestyle. Make sure every dollar that comes in has a "job" — it should go to covering some expense, debt or be earmarked for savings.
To build a budget or "spending plan," start with living expenses then debt repayment. There's another great worksheet on creating a spending plan at
Ideally, you'll have some money left over after itemizing all of your expenses and debt obligations and that extra cash will go to savings. More likely though, you have more expenses than money to pay them. Don't worry, though. Just make sure you can pay your basic living expenses. We'll tackle the debt issue next.
Stop digging that debt hole
High-interest credit card debt and high balances can be a toxic combination. Do not add new debt to old. Put away the plastic. Cut up those cards or at least stick them in the back of your desk drawer. Do not use them, no exceptions.
If the balance on any card is more than 30 percent of the credit limit, pay down that debt first. Creditors consider you a risk if you use too much of your available credit and can then lower your credit limit and raise your interest rate, making it harder to pay back to the money you owe.
Then, start paying off the debt that has the highest interest rate, and next highest and so on.
Once the debt is paid off, don't start spending the "extra" money you now have. You couldn't spend it before, so don't start now. Put that "minimum balance" or "monthly debt payment" toward savings.
Save for today and tomorrow
You need a life jacket when the financial turmoil gets to be too much. Your retirement account has dwindled and your house isn't worth as much as you paid for it. But at least you have enough cash on hand to ride out the storm — if your car breaks down, the hot-water tank goes bust, or you lose your job. You do have a rainy-day fund, don't you?
If not, your savings for today needs to start today. Have 10 percent of your paycheck directly deposited into a high-interest savings account. HSBC Direct offers a 3 percent rate right now. You want to start by having at least one month's income socked away, then build up to three to six months, depending on whether you feel your job is secure and if you have dependents. Trying to figure out how to save that 10 percent? You may need to reduce your spending. Cutting out the credit cards will help.
You also need to save for tomorrow. Contribute to your company's retirement plan. That 401(k) or 403(b) plan is tax-deferred savings, and that kind of savings is hard to beat even in a down market. Put in at least enough money to get a matching contribution from your employer, if one is offered. You don't want to miss out on that free money. But remember, if you have no cash savings, building up that rainy-day fund should be your first savings goal.
Having a strategy to get more cash on hand for an emergency or unexpected expense is your own economic stimulus plan. Sure, a check from the government would be great, too. But you don't want to have to wait around for that. Take control and create your own stimulus package now.
Contribute more to your retirement fund
You don't need to invest all of your money in stock mutual funds if that's too risky for you. But your company's retirement plan is the best tax-deferred savings you'll find. You lower your income tax burden while saving money. And the limits go up this year: For 401(k)/403(b)/457 plans, you can contribute up to $16,500 (age 50 and older, add a $5,000 catch-up contribution). Traditional IRAs also offer tax-deferred savings and while you pay tax on the money you put into a Roth, you can take it out tax-free at age 59 1/2. Here are the new limits: For IRA/Roth IRA, you can contribute $5,500 (age 50 and older, add a $1,000 catch-up contribution).
At the end of all this, the extra cash should be used to:
1) pay down debt
2) build cash reserve
3) contribute to retirement savings. Split the extra sum and put a third toward each. That way you're striving for all of these goals at the same time.
Refinance before rates rise
Mortgage rates are at historic lows. The 30-year rate was at 5.14 percent last week, which means the cost of borrowing is in your favor. If you can qualify, you may want to consider refinancing. The savings can be substantial. Take, for example, a $400,000, 6.25 percent loan that equates to a monthly payment of $2,463. Refinance that loan at 5.5 percent and the monthly payment becomes $2,216 (assuming $2,000 in closing costs). That equates to a savings of $247 a month, or nearly $3,000 a year ($2,964). Calculate your potential savings at
http://www.hsh.com/usnrcalc.html . Make sure you put that savings directly in your emergency fund or put it toward your retirement savings.
I don't really want to tell people to file for bankruptcy. It's a last resort for folks who really have let their finances get way out of control in relationship to their income. A bankruptcy lawyer can help make the determination as to whether the consumer will be able to get a complete or substantial discharge of debts and at the same time keep their home and vehicle. Bankruptcy is usually a better option than going with a debt settlement company, since many are just out to take your money. But the best first step is to talk to a certified credit counselor, and you can find one through the National Foundation for Credit Counseling at debtadvice.org.