A new year brings renewed energy to strive for one’s goals and
dreams. And key to that pursuit is money.
Whether you’ve set your sights on launching a business, taking a
trip to Patagonia, or buying a house, you can’t achieve it without having
enough cash. Even if your dream is to spend more time with family, what will
free up that time is having the financial security to not need to
spend those precious hours working.
If you’ve set your
financial resolutions (learn how to make ones that stick here), use one of these 10 quick,
easy ways to build your wealth so you can achieve them this year.
Spending
1. Seal the leaks.
Take a look at your monthly and annual recurring expenses: gym
membership, phone, cable, Internet, Netflix and Spotify subscription, Amazon
Prime, bank fees, credit card annual fee, car insurance, homeowner’s/renter’s
insurance, etc. Which of these do you no longer use much? If you’ve got an
$8/month Netflix streaming subscription but have only actually watched movies
on it five times in the last year, then you’ve just paid $96 to watch five
movies — about $19 per film. Cut the subscription.
Take a look at your phone
usage: Are you paying for 5,000 texts a month but using only 500? Drop to a
lower plan. Get some new quotes for your insurance to see if you can get the
same coverage for a lower price. If you realize you’re paying $120 a year just
to have a checking account, get yourself a free one. (Learn what to look for in a bank account here, andhow to switch banks here.)
2. Get a budget you can stick to.
If you find it hard to stay on track with your budget, keep it
simple. Start with your take-home pay, which should already be reduced by the
amount of your retirement contributions to your 401(k) or other
employer-sponsored account (more on that below).
Subtract housing, transportation, utilities and groceries (force
yourself to stick to a figure you know you can hit every month). Ideally, they
should total no more than 50% of your monthly take-home.
Then take at least 20% of that amount to allocate for debt,
savings and IRA retirement contributions. This is your financial goals
money.
With the remaining amount
(which should be no more than 30% of your monthly paycheck), divide that by
4.33 to get your weekly allowance. This amount is what you have to spend on
everything else: clothing, dining out, entertainment, classes, household
supplies, toiletries, books, etc. Take it out in cash weekly, spend it down
until it’s gone and then get creative until the next week. Or, if you’d like to
use credit or debit to track your expenses, create a spreadsheet that states your weekly allowance and subtracts your expenses
as you enter them. Such a spreadsheet will allow you to plan ahead:
when you schedule an event, mark down the projected cost so that you know, when
you enter the week, you have that much less to work with. I used just this kind
of spreadsheet to pay down debt and build enough savings to quit my full-time
job, and I continue to use it to stay within my budget. Here’s a more detailed explanation of how to set up a budget.
Debt
3. Make a plan to get out of
debt.
Whether you’ve got mad grad school debt or a $10,000 balance on your credit
cards, don’t feel overwhelmed. As long as you stick to a budget that keeps you
from going further in the red and follow a plan to pay down your debt, all it
will take is time until you’ve paid it off. To get started now, make a list of
all your debts by interest rate, ordered highest to lowest, plus their minimum
monthly payments. From now on, take your financial goals money and
apportion it toward the debt, paying minimums on all your debt except the
highest interest-rate one, which gets the rest of the money. After you pay that
debt off, move your second-highest interest-rate debt into the top spot and
repeat.
4. Earn more money.
Also, pick up a side job
and shovel the extra income toward your debt: Pick up freelance work, start
generating passive income, declutter and sell your discards such as electronics or
designer items, do odd jobs on Craigslist, TaskRabbit or Fiverr, look into
mystery shopping, babysit, tutor, and do whatever else you can to earn an extra
buck. Then — and this is the crucial last step — take what you earn
and ship it off to your creditors.
Saving
5. Automate your savings.
If you don’t have debt, take that financial goals chunk of
your take-home pay, and put it toward savings and retirement. (Depending on
your debt vs. savings vs. retirement savings and timeline, you may also
want to work toward two or all three goals simultaneously.) After subtracting
the amount to contribute to retirement (more below), decide how much you can
allot to your savings goals. The calculation will be based partly on how much
those items cost, your timeline, and however much you can spare of the 20%,
whether it’s the full amount or just a portion of it.
6. Remind yourself what you’re
saving for.
Sometimes, delayed gratification is a drag. To stave off
spontaneous purchases not aligned with your goals, put visual reminders of what
you’re saving for in places where you’ll see them: a photo of Patagonia on your
desk, a shot of your dream house on your fridge, the logo of your new venture
inside your wallet. Whatever you’re dreaming of, get an irresistible image of
it, and put it in places you frequently see so you don’t forget the reason for
all these budget rules.
Retirement
7. If you can, max out your
contributions.
Your company may offer you
free money in the form of a matching 401(k) contribution. It’s usually some
kind of match, such as, 3% of your salary for every 6% you contribute to your
401(k), or, if you’re lucky, it’s 1:1 matching. Whatever the deal is, make sure
to get that money. If it’s a 1:1 match for 5% of your salary, then you’ll sock
away 10% of your salary but only have to shell out 5%. This will take money out
of your paycheck, resulting in the take-home pay figure we’ve been using above.
If you fall within the income limits for a Roth IRA (see “Roth IRA phase-outs”), allocate some portion of
your financial goals money to max out your Roth contribution for the year
— $5,500 for 2015, which works out to $105.77 a week or $458.33 a month. For
those 50 and older, contributions can total $6,500 a year, or $125 a week or
$541.67 a month. If you have room in your budget for further contributions to
your 401(k), then max that out, and if you still have additional funds, put it
in a taxable account.
If you earn too much for a Roth IRA, then prioritize maxing out
the 401(k) first before maxing out your traditional IRA, and put any remaining
funds for retirement in a taxable account.
8. Set up a regular transfer
and purchase of investments.
To automate your savings,
set up weekly, biweekly or monthly transfers into your IRA (and, if you have
one, taxable account), and then also be sure to set up a regular purchase of
the investments you’ve chosen for your account so your transfers don’t sit in
cash but get invested right away. As for how to invest, follow three main
rules: keep your costs low, diversify with investments like index funds,
exchange-traded funds or target-date funds, and be as tax-efficient as
possible. (Find out here the 10 tricks that will help you outperform most investors.)
Credit
9. Set up a foolproof system
for paying your bills.
As you’re building your
wealth and working toward your goals, you’ll want to maintain good credit so
that you can use your savings to accomplish a big goal, like buying a house.
Since an important part of your credit score is your history of on-time vs.
late payments, make sure you don’t miss any due dates. Set up automatic bill
pay in your checking account, or use a service like Mint Bills (formerly
Check) to remind you of upcoming bills, and also put the due dates for your
recurring bills in your calendar so you have multiple reminders to get your
payment in on time.
10. Schedule regular check-ins
to get your free credit report.
To protect against
the horror of identity theft, check your credit score often. The
three major credit bureaus are each required to offer consumers one free credit
report a year, all of which can be obtained atAnnualCreditReport.com. To keep tabs on
your identity as often as possible without having to pay, pull one from each of
the credit agencies every four months — i.e. TransUnion in January, Experian in
May, and Equifax in September. (You can also get free credit scores on Credit Karma.)
It’s not sexy, but building wealth often comes down to fairly
mundane habits like the ones listed above. If you can follow through on all the
above tips for the rest of the year, come December, you’ll be looking at a higher
net worth figure, appreciating your progress toward your goals or savoring the
joy of achieving them.
