The start of the new year is a good time to look at your finances and make some adjustments where needed.
Herb Weisbaum, a contributing editor at Checkbook.org, joined us in the KIRO 7 Live Studio on Tuesday to talk about three things you can do to get your finances under control.
So, what’s first?
#1 CREATE OR UPDATE YOUR BUDGET
Most Americans have a monthly budget, so if you have one, update it. With inflation, your expenses may have gone up significantly last year. If you don’t have a budget, now is the time to make one.
Start with the major household expenses, such as mortgage or rental payments, food, utilities, insurance, medical and transportation costs. Your checking and credit card statements may remind you of expenses you missed.
Your budget doesn’t have to be “pinpoint precise.”
There is no need to track every candy bar you buy, but if you have a three-latte-a-day habit or go out to lunch several days a week, those are significant expenses that should be noted.
Track your housing, medical, food, transportation, clothing, debt payments, utilities, insurance, and recreation expenses.
By looking at where most of your money is going each month, you can figure out where to prioritize and where to cut spending. You may be surprised at what you find.
Weisbaum pointed out that since the pandemic, many people have oversubscribed to entertainment services. Those automatic monthly payments are easy to overlook. Maybe you don’t need five or six streaming services. Pick one or two and cancel the others.
#2 PAY DOWN CREDIT CARD DEBT
Credit card debt is the most expensive type of consumer debt, so if you have a credit card balance, focus on paying it off. This will free up money for your monthly budget.
The average interest on unpaid balances is currently 20.74%, according to Bankrate.com. The average retail card interest rate is even higher, around 29%.
“We’ve been tracking rates for about 40 years, and they’ve never been higher,” said Ted Rossman, a senior industry analyst at Bankrate.
A Bankrate survey conducted last summer found that 47% of credit card holders carry debt from month to month, up from 39% two years ago. Sixty percent of those individuals carried a balance for at least a year.
Weisbaum said making the minimum payment is better than skipping a payment—you’ll avoid a late payment fee that will hurt your credit scores—but it won’t do much to whittle down that balance, and you’ll pay a staggering amount of interest.
The average American has a credit card balance of around $6,000, according to Bankrate. Making the minimum payment, you’d be in debt for more than 17 years, and at the current interest rate, you’d pay about $9,000 in interest.
If you can’t make more than the minimum payment, financial experts suggest moving that high-cost balance to a zero percent balance transfer credit card. With some cards, the 0% promotional rate lasts up to 21 months.
Don’t make new payments. Don’t use this to kick the can down the road.
Just divide what you owe by the number of months in your 0% term. That’s because the rate on the remaining balance, after the interest-free period ends, will skyrocket to 20, 25, or even 30%.
Expect to pay an upfront fee of 3 to 5% on the balance transferred to that new card. Even so, it can be money well spent. You could potentially avoid many hundreds or even thousands of dollars in interest if you’re disciplined about paying down that balance.
#3 START AN EMERGENCY FUND
Everyone should have a cash reserve that’s set aside for unplanned expenses that are not part of your monthly budget, such as car problems, home repairs, or medical bills. An emergency fund can also shield the blow of losing your job.
Most Americans have very little emergency savings. About 24% have none, and an additional 39% have less than one month’s income set aside, according to a 2022 survey by the Consumer Financial Protection Bureau.
The report noted, that those without an emergency fund often turn to high-interest credit card debt or other loans to cover those unexpected expenses, resulting in even more debt. You owe more money, you’re paying such a high-interest rate, and it can really snowball out of control pretty quickly.
Financial advisors often recommend having enough money in your emergency fund to cover your expenses for three to six months. But that goal is pretty daunting for many families, especially those living paycheck to paycheck. So make a smaller go. Fund that and move along.
If possible, move money into your emergency savings account automatically. Many employers will divide paychecks between checking and savings accounts. Just make sure there’s enough money going into checking to pay your bills.
If you’re cutting it close each month, you might make that deposit manually, Palmer said, to make sure you don’t overdraw your account.
But what if the idea of putting money aside in savings is impossible? What else can you do?
Weisbaum says if you’re struggling to pay your bills or falling deeper into debt, contact a non-profit credit counseling agency. They can help you make a budget and set up a plan to pay off that debt. In many cases, they can negotiate with your creditors to get lower interest rates.
To find an agency near you, or to talk to a trained counselor on the phone, visit the National Foundation for Credit Counseling website. The initial consultation is typically free.
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