Starting the New Year off with specific money resolutions to save more and to pay off debt in order to achieve financial independence is certainly a good idea. Striking a balance between paying off credit card and student loan debt and at the same time establishing emergency and retirement savings can be challenging. And what if you have tried to manage your budget before and are not making the progress you would like or worse still have found yourself in financial trouble?
The following are five helpful strategies to consider for the New Year:
- Establish an Emergency Fund-While it is generally a good idea to have emergency savings representing 6-12 months of your immediate expenses, it may make sense to pay off credit cards with high interest rates with these savings if they are earning little to no interest. You can then use the credit card for emergencies until you can build up your emergency funds again. However if this just creates a cycle of creating new debt you will be better off paying the card off gradually and assessing whether you are a good credit card candidate.
- Pay Off High Interest Rate Debt-If you have credit cards charging 18-22% shop around to see if it makes sense to transfer those balances to a lower interest rate card. See Bankrate.com An exception to paying down debt first before saving might be very low or no interest rate loans like car loans or a mortgage that also allows for tax deduction
- Take Advantage of Your 401K Match-The biggest exception for paying down debt before saving for retirement is when your employer’s 401k offers matching contributions. In this case you should consider participating in your plan so that you receive this “free” money. This is a great return on your investment. As cash flow
improves with higher interest debt being paid, consider investing more into your 401k with a goal of 15% of your salary. - Careful With Student Loan Refinance-Repayment of college loan debt has become a rather complicated issue. Federal student loans have multiple flexible repayment plans of which some have terms that allow for unpaid loans to be forgiven after 25, 20 and even 10 years in some circumstances. Students who refinance federal loans into private loans lose these benefits. Bottom line is that refinancing to a lower interest rate and smaller payment can be far more damaging long term than staying with your current loans or consolidating under the latest federal program. See Federal Direct Consolidated Loan program (1-800-557-7392) for additional information.
- Get Professional Help if You Need It-If you are in serious financial trouble (considering bankruptcy) or are unable to get yourself out of financial trouble on your own, consider credit counseling. Counseling from one of these nonprofit agencies does not automatically mean a debt management plan (DMP), where you consolidate your debt into one loan at a lower interest rate. This strategy will only be effective if you can afford the new payment. Check with your Better Business Bureau and the National Foundation for Credit counseling (NFCC-188-388-2227) for reputable agencies. When working with an agency the counseling should include more than just a DMP plan. Do they offer classes on budgeting and debt management, free counseling session or help you create a budget. Make sure you understand the cost and fees associated with any services up front and read the contract. Consider whether you could do on your own what the agency is going to do for you. This would include establishing and managing your budget and debt, which may include calling creditors and setting up repayment plans.