How to Improve Your Finances This Year: What to Know

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 for improving your finances.

Take Inventory of Your Finances

Consider starting by 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, and any debt you owe. Regularly reviewing your credit reports and card statements could also help you stay informed about your financial health. 

Try inventorying 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 you should review at the end of the year to help measure your progress. Establishing an emergency fund, paying your bills on time, and managing your extra money wisely will help you achieve your long-term goals. You ideally want to see your net worth trend 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 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 and avoid late payments.
• 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 total amount you put toward it every month to the minimum payment on the second-highest interest-rate debt. Keep paying until that debt is paid off.

Continue down your list until you reach the debts with very low interest rates. Once you have only debts with a lower interest rate left, ask yourself 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. Additionally, using mobile apps to track your progress may be beneficial. 

Setting a Timeline

Creating a timeline for your goals is an effective way to enhance your financial health over time. Start by defining your financial goals clearly. Whether it's building an emergency fund, paying off credit card debt, or saving for a major life event, having specific targets not only helps you stay on track but also helps provide a sense of security and peace of mind.

• Break down your goals: Divide your goals into more manageable steps. Instead of setting one annual goal (e.g., saving $5000 a year), break it down into manageable monthly goals (e.g., $417 a month).
• Set deadlines: Assign a deadline to each step. This will help keep you on track and provide a sense of urgency.
• Monitor your Progress: Regularly check your progress against your timeline. Adjust your plan if you don't meet your goals by the deadline. Use budgeting apps or spreadsheets to help track your finances.

These steps could significantly improve your financial situation and help you achieve your desired financial planning objectives.

Clear Out the Financial Clutter 

Ask yourself if your daily living expenses could be eliminated from your budget. Is there anything that would be easy to cut out or reduce so you could save or invest more instead? Adjusting your budget could be a powerful way to improve your finances and allow you to set financial goals and healthier money habits.

Common areas to cut costs include:

• Expensive cable bills.
• Pricey fitness classes (consider a more affordable gym membership or home workouts).
• Unused or unwanted subscriptions. 

To stay organized and on track, consistently track your spending and maintain a detailed budget. This approach will help you identify areas for adjustment, improve your credit score, and ensure your financial goals are met. Regularly reviewing your budget could keep you focused on essential spending and monthly expenses.

Managing Recurring Charges

If left unchecked, recurring charges could quietly drain your finances. These are regular, often monthly expenses that you might overlook but may add up significantly over time. 

Start by identifying all your recurring charges. This includes:

• Subscription services (e.g., streaming services)
• Memberships (e.g., gyms, clubs)
• Regular donations or contributions
• Any automated services (e.g., cloud storage, software licenses)

Assess each charge critically. Ask yourself if you truly need the service or if cheaper alternatives are available. Try negotiating for a lower rate for services you wish to keep but find too expensive. Many companies offer discounts to retain customers. 

You could free up a chunk of money by identifying, evaluating, and managing your recurring charges. Consider putting the extra funds into your investments, retirement, or monthly savings goals. Keeping a close watch on recurring charges is a simple yet effective strategy for maintaining financial health and improving your overall financial situation. 

Planning for Big Purchases

Planning for significant expenses requires careful consideration and strategic saving. Here's to prepare:

• Set clear objectives: Identify your anticipated big purchases and determine each goal's estimated cost and timeline. This will help you create a clear expense plan.
• Regular contributions: Make regular contributions to your savings for these expenses. Treating these contributions as non-negotiable expenses, like paying bills, maybe a good idea. Automatic savings could ensure consistent contributions.
• Prioritize your goals: If you have multiple purchases, prioritize them based on urgency and importance. Consider your long-term financial life and health savings when setting priorities.

You may also want to consider looking for discounts or deals on your purchases and avoid impulse purchases. By setting clear goals and following through, you could effectively plan for and achieve your big purchases without compromising your financial stability.

Develop an Investment Strategy

Investing could help you grow your wealth over time. Here's a simple way to get started:

• 401(k) Plans: Contribute pre-tax income to your employer-sponsored 401(k) and take advantage of any employer matching funds. This helps build your retirement savings. 
• IRAs: Open a Traditional or Roth IRA for additional retirement savings. Traditional IRAs offer tax-deferred growth, while Roth IRAs provide tax-free withdrawals. 
• Investment Accounts: Use general investment accounts for stocks, bonds, and mutual funds. These accounts offer flexibility and no early withdrawal penalties. Diversify these to create a well-rounded investment portfolio.

Consider consulting a financial advisor to tailor your financial strategy and ensure you're on the right path. You may achieve your long-term financial goals by starting early, regularly contributing, and staying consistent.

Set It & Forget It

Improving your finances doesn't have to be complicated. While some tasks are harder than others, one thing you could do is to "set and forget" parts of your finances.

Building a robust savings plan is essential for improving your financial health. Consider setting up automatic monthly transfers from your checking account to your savings account. This ensures that you are consistently saving a portion of your income without requiring any additional effort. 

Consider 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 your contributions by 1 or 2 percent yearly. You'll save much more, and the gradual increase will be easier to adjust. Consulting a financial advisor could also provide insights into better financial planning and achieving long-term savings goals.

Improving your credit score is another critical element of a sound financial strategy. Reviewing your credit reports regularly and managing your credit card debt could positively impact your financial life. 

The Bottom Line

Are you looking to make this year more successful financially? Consider implementing a few of these ideas to get started.

Sources

1. What Is the Debt Avalanche? https://www.debt.org/advice/debt-avalanche/.