Tom: Happy New Year! You are here to talk about some suggestions for resolutions for 2016 that will improve our money management.
Mellody: You’ve got it, Tom. Today I have three tips for our listeners, and if you stick with these, 2016 will be a year of improving finances.
Tom: That sounds great! Give us your first tip.
Mellody: You know I was going to start off with retirement, didn’t you? My first suggestion is to start the new year off on the right foot by increasing your 401(k) contribution. There are a number of ways that you can do this, the first of which is to simply talk with your 401(k) plan administrator. Raising your contribution by just 1% will reap significant benefits over a lifetime, and will require relatively little sacrifice.
For example, if you are making $50,000 a year, 1% of your income is $500. Over 26 pay periods, that is under $20 per paycheck. But that increased contribution over 40 years will grow to over $60,000 at a 5% annual rate of return.
Another great opportunity to increase your contributions comes when you get a raise. If you direct these new earnings directly into your 401(k), you won’t feel that change in income, and it will benefit you both at tax time and when you retire.
Finally, simply taking a look at your spending habits and see where you can scale back in order to increase your contributions. I would suggest tracking your spending on items that are not necessities for a month, and figuring our where you can find $20 a week. Maybe you can pack lunch 2 days a week, or buy fewer apps, or reduce the amount of data you use on your phone. Cutting back and using that money for your retirement savings is a great resolution for 2016.
Tom: How about your second piece of advice for starting off 2016 on the right foot?
Mellody: It also involves your 401(k). If you are like many Americans, you have worked at a number of different companies, resulting in many retirement accounts, many statements and not a lot of certainty about what exactly your money is doing for you. If this sounds like you, make 2016 the year to consolidate your 401(k) accounts.
The process, called rolling over your accounts, will take old accounts, cash them out, and invest them with your preferred financial services firm. Beyond the ease of having just one account, this will come with a few other benefits; first, if you have investments in several locations, it’s difficult to keep a handle on your current portfolio.
You could be invested in the same funds in many accounts, or you could be invested in funds that end up cancelling each other out. When you consolidate your investments into one place, it becomes much easier define a concise strategy and make sure you have a comprehensive asset allocation. Rolling over your 401(k) should also cut down on the number of fees you are paying.
And if it sounds complicated, don’t worry. The process is actually quite easy, and usually involves a quick call to each financial advisory firm, and a short form. Combining your accounts is a great way to improve your path to retirement at the start of a new year.
Tom: How about dealing with some of that holiday credit debt?
Mellody: You are on it, Tom. My third financial tip to kick off 2016 is to consolidate and pay down high interest credit card debt. Getting to a lower interest rate and reducing this debt burden will help your finances, and over time it will pay additional dividends in the form of an improved credit score.
There are a number of ways to consolidate your credit card debt. First, you can transfer credit card debts to a zero or low-interest credit card. You can also get a debt consolidation loan with a lower interest rate from a bank, credit union, or installment loan lender. These options will reduce the number of payments, and the interest rate.
One note of caution here. You need to be careful that the lower rates are not teaser rates, you have to stick to a repayment plan, and not incur more debt on top of your current balance.
If you are thinking about debt consolidation, you may want to consult a credit counselor first. If you’re not sure of the best way to address your debt, a counselor can help you explore your options.
Tom: Thanks for the advice, Mellody. Hopefully we can all start off 2016 by making some positive financial moves!
Mellody: You are welcome, Tom. If you follow this advice, by the time 2017 rolls around you will be in better financial shape. Have a great week!