With a new year approaching, it's time to take stock of personal finances once again. For many consumers, the end of the year means setting goals, paying off debts, assessing retirement accounts, and generally getting everything in order, money-wise.
If you want your financial health for 2021 to be better than it was in 2020, there are plenty of options.
For example, are you ready to boost your credit scores?
Do you know how?
What about your retirement situation?
Are you socking away enough cash each month for those non-working years?
Do you have written goals about things like reducing credit card debt, creating an emergency fund, and providing for health emergencies?
If not, perhaps you could add some stability to your monetary life with the following targeted strategies. Each one is designed to do its part to shore up a particular area of concern.
Increase Your Credit by 100+ Points
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Get Debt Under Control
One of the first things you can do to get your financial health in order is pay down credit card balances. Of all your debt, the plastic kind usually comes with the highest interest rates.
The good news is that there are multiple ways to defeat the credit trap of high balances and higher interest. Two of the most effective methods for reining in debt have catchy nicknames: snowball and avalanche.
The avalanche method is simple. If you have several pieces of plastic, pay the minimum on each one. Then, set aside a fixed amount of money each month and pay it toward the one with the highest interest rate. Once the high-rate account is paid off, repeat the process with the next-highest rate card until all your plastic balances are at zero.
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The snowball technique is quite different. You pay minimums on all your cards, but pay extra funds toward the card with the smallest balance. When it's paid in full, move to the next small-balance card and eliminate it.
Mathematically, the avalanche method is wiser, but the snowball technique offers a massive dose of psychological positivity because you get rid of one or two smaller-balance cards rather quickly.
Use Private Student Loans To Pay For Schooling
If you're headed to college or graduate school, for the first time or after years at a career, how do you intend to pay the bills?
Some people use savings, borrow from relatives, take out a second mortgage, rob retirement accounts, or hope for scholarships and grants. The smartest way is to use private student loans.
Not only are borrowing limits on private loans high enough to cover all the relevant expenses, but it's possible to get competitive rates and real-world repayment terms.
Applying is easy and you can then head into your coursework without having to worry about tuition, fees, and other school-related expenses hanging over your head.
Leverage FSA And HSA Advantages
Flexible spending accounts and health savings accounts are a super-smart way to put some money aside for medical bills.
Not only do both these techniques reap significant tax breaks for savers, but they offer the advantage of earning interest on the funds until they're withdrawn.
Additionally, there are thousands of employers who offer to match every dollar you put in, which is like getting free money for future medical expenses.
Choose Credit Cards Wisely
Once you've eliminated all the balances on your current cards, choose one or two that are best suited for your spending habits.
That means shopping around for rewards cards that offer benefits like air miles, cash back, and hotel deals you're likely to use.
The trick is finding a decent rewards card that comes with a reasonable interest rate, so be careful not to jump at the first one that looks good. Weight the advantages and disadvantages before choosing.
In the end, try to see if you can live with just one card, or two at the most.
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Maximize Retirement Savings
Are you putting enough money into your IRA, 401k, or whatever type of retirement fund you have? Is there a magic number?
Those are the most common questions on people's minds, and they boil down into one, "what is enough?"
Many working adults begin by setting aside five percent of their pre-tax income for IRA-type accounts. Eventually, consider aiming for 15 percent.
If you do the math, you'll find that a consistent 15 percent contribution to retirement savings is often an ideal amount to provide for a comfortable nest egg without fear of financial stress.
Check Credit Scores Regularly
At least twice per year, you should check your scores with all three of the major credit reporting bureaus. Don't rely on the free combined score reports your bank offers, or the unified scores you'll get from many of the card-issuing companies. You want the big three.
Study the reports for errors, which, contrary to popular belief, are quite common. Immediately report any errors to the relevant bureau. Keep an eye on changes to your scores and read each bureau's explanatory pages about how to read the reports. They each have their own methodology and lingo, so you need to take your time with this step.
Build An Emergency Fund
You'll hear all sorts of misinformation out there about emergency funds. The fact is that there are no hard and fast rules. A good starting point is to set aside one-months’ worth of expenses for that inevitable rainy day.
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Ideally, think about building the fund up so that it holds enough to cover four months of expenses. That gives you a decent cushion in case of job loss.
Make Realistic Goals For The Year
Make written goals for next year. There's no reason to linger. Make your financial health a priority by setting income, savings, tax planning, and credit elimination goals each year.
Don't wait until late December, either. Use the last few months of the year to think about where you want to be 12 months from now. Perhaps a job promotion is in your sights, or a home purchase, new car, college degree, or something else. The point is to keep moving and getting better as the years pass.