Written by Deb Paulsen | Community Financial Education Coordinator
Holiday shopping and celebrations are now behind us and we hope that you are left with cherished memories and a healthy bank account. But if your finances didn’t quite survive the holiday hit, you aren’t alone. Americans racked up an average of more than $1,000 each in holiday debt according to 2018 information presented by CNBC.com. Only 42% of shoppers said that they would pay off those purchases in three months or less. So how can you course-correct and make 2021 a year of smooth sailing with your finances?
1. Take Control Of Your Cash Flow
Cash flow is simply money coming in and money going out. But unless you understand where your money is going, you will never gain control of its flow. By keeping track of your spending for one entire month, right down to the penny, you will gain a better understanding of where your money is going. This means not only keeping track of the bills that you are paying, but also keeping receipts for every single purchase that you make. You may find that you are spending far more money on certain things than you even realized.
2. Start Small To Make A Big Impact
Now that you can see where your money is going, where can you start making changes? Although you may not be able to adjust any of your fixed expenses like your car payment, where can you cut back in your variable expenses? Can you change your own oil in your vehicle? Rent movies at Redbox or watch Netflix at home instead going to the theater? How about cutting back on your trips to the coffee shop? Did you realize that if you are spending $4.75 on coffee every morning on your way to work, it is costing you $1,235.00 a year? By making coffee at home, you could use the money you are saving to build an emergency fund or pay down debt substantially.
3. Understand Your Debt and Snowball It Away
Many people only see their debt as their monthly payment instead of the total amount they owe. By reversing that and looking instead about the total amount owed, it helps you realize the importance of setting goals and avoiding new debt.
One way you can get out of debt faster is to use the Snowball Effect. The Snowball Effect builds more and more momentum until you successfully knock out all of your debt! Start by applying any extra money you can free up in your budget towards your debt (any amount counts). Next, list all of your debts and include the loan rate, outstanding balance, and monthly payment. Continue making the minimum payment on all of your debts, but put the extra money towards your highest interest debt. Keep doing that every month until that debt is paid off. With that payment eliminated, apply the same amount of money that you were paying on it to the next highest interest debt. So now you are paying the minimum payment on your second highest interest debt, plus the full amount that you were paying on the debt you just paid off, until your second debt is paid off. Continue applying the previous debt payments to each debt until you have knocked them all out. The more debts you eliminate, the faster the snowball rolls!
4. Check Your Credit Report And Credit Score
As you are putting in the hard work to cut back on variable expenses and pay down your debt, it’s also important that you understand the information in your credit report and check it annually to make sure it’s accurate. What exactly are you looking at when you view your credit report? A detailed report of your credit history that provides four types of information: identification and employment information, public record information (bankruptcies, foreclosures, tax liens, and judgements), payment history, and inquiries (all creditors and potential employers who have requested your credit report in the past two years). You are entitled to request a free copy of your credit report annually from each of the three credit reporting agencies (Equifax, Experian, and Trans Union) by visiting www.annualcreditreport.com.
It is also important that you know and understand your credit score, which is a number ranging from 300-850 that reflects your ability to pay for services or repay loans. The higher your credit score, the easier access you will have to credit and better interest rates. Many financial institutions, including Royal Credit Union, provide credit scores free of charge to their members. Things that affect your credit score are payment history, amounts owed, length of credit history, new credit, and credit mix. Of these, the biggest factor (35%) is payment history, so do yourself a favor and be sure to make all of your debt payments on time! To access your score in online banking, simply select the Your FICO® Score option in the upper right corner under the Logout option.
5. Set SMART Goals And Keep Your Eye On The Prize
Now that you can see the big picture of your financial situation, what goals can you set to improve your finances in 2021? Make sure that you set yourself up for success by creating SMART (Specific, Measurable, Attainable, Relevant, Time-Bound) goals. Make it specific, not too general, i.e. “I want to pay off my $5,000 student loan” instead of “I want to get out of debt.” Are you able to measure your progress as you work towards your goal? Is it attainable, or is it reasonable that you can accomplish this goal? Is the goal relevant and does it fit with your immediate and long-term plans? And finally, can it be time-bound by setting a date for it to be accomplished?
Once you have determined your goal, write it down on a piece of paper and include why it is important to you. People who write down their goals are 42% more likely to accomplish them. Put the goal somewhere that you will see it every day, several times a day, such as on a mirror, refrigerator, or door. Create an action plan that is broken down into small, attainable steps that you can cross off as you achieve them. This will serve as a reminder that you are sailing toward your ultimate goal.
We wish you well on your journey toward financial success in 2021. Royal Credit Union is always here to help you reach your goals. If you’d like to take an in-depth look at your finances with the help of a Royal expert, we offer all Members free financial reviews. Find out more about our free financial reviews here.