Table of Contents
Key Takeaways
- Take inventory of your full financial situation - assets, liabilities, income, expenses.
- Calculate your net worth. Pay off high interest debt first using the debt avalanche method.
- Look for ways to cut expenses and eliminate financial clutter.
- Automate savings and bill payments to "set and forget" good financial habits.
- Gradually increase retirement contributions over time for hands-off saving.
Are you wondering how to get the most out of this year? Why not make this the year you start focusing on bettering your life financially? Consider some of these tips on how to improve your finances.
Take Inventory of Your Finances
A first step to consider is organizing your finances. It's good to understand all the details of your cash flow (money coming in and going out each month), your savings and retirement plans, any debt you owe or balances you carry, and more.
Try making an inventory of what you have (your assets) and what you owe (your liabilities). This could include:
- Bank accounts (checking and savings)
- Cash savings vehicles, like money market accounts or CDs
- Retirement accounts
- Other investment accounts
- Real estate and valuable personal property
- Credit card balances
- Car payments or student loans
- A mortgage
Once you tally everything up, subtract your liabilities from your assets. This number is your net worth, which will be good to review at the end of the year to help measure the progress you make. You ideally want to see that number trending upward over time.
Pay Off Your Debt
Was your net worth positive or negative? If it was a negative number, you have more liabilities than assets. If you want to change this, take a closer look at the list of your debts, and then order them from the highest interest rate to the lowest.
The highest interest rate debt is the one that costs you the most money, so it likely makes the most sense to pay off that debt first. There are many ways to start paying off debt but one potential way is to use the "debt avalanche" repayment method.1 Here's how it works:
- Make the minimum payments on all your debt.
- Find the debt with the highest interest rate.
- Focus on paying off the highest-interest rate debt first.
- Once that debt is gone, add the full amount you put toward it every month to the minimum payment you're making on the second-highest interest rate debt. Keep paying until that debt is paid off.
Continue down your list until you reach the debts that have very low interest rates. Once you have only debts with a lower interest rate left, ask a new question: Should you focus on paying off debt, or should you save and invest more?
The answer depends on your situation, but the rule of thumb is to choose whichever option gives you the better rate of return.
Clear Out the Financial Clutter
You can also consider taking inventory of all your income sources and then listing all your expenses. Even if you don't spend more than you earn, you could free up more cash to help grow your net worth this year.
Ask yourself if any of your expenses could be eliminated from your budget. Is there anything that would be easy to cut out or reduce so you can save or invest more instead?
Some of the usual suspects are things like expensive cable bills, pricey fitness classes you could swap for a less expensive gym membership or subscriptions you no longer use or want.
If you're not already, consider tracking your spending throughout 2019 and keep a budget. That will help keep you organized and on track.
Set It & Forget It
If you're wondering how to improve your finances, you might expect the process to be tough. And while some tasks are harder than others, one thing you can do is to "set and forget" parts of your finances.
For instance, consider automating your contributions from your checking account to your savings account, and setting up automatic bill payments to help eliminate unnecessary late fees. You could also start automatically contributing a portion of your paycheck to your retirement plan. If you're already building your retirement savings, consider setting a reminder to bump up your contribution by 1 or 2 percent every year. You'll save much more, and the gradual increase will be easier to adjust to.
The Bottom Line
Are you looking to help make this year more successful in terms of your finances? Consider implementing a few of these ideas to get started.
Sources
- What Is the Debt Avalanche? https://www.debt.org/advice/debt-avalanche/.
