"I'm going to get my money right." How many people start the new year with this lofty goal, only to find budgets blown and savings depleted by mid-year?
Beginning 2018 with a solid budget is a good first step to changing spending habits, but it's not the only key to success.
"A budget is really about saying 'no,'" says Jude Boudreaux, partner and senior financial planner at The Planning Center, "but you also have to figure out the 'yeses.' What is it you really want to do with your money? The more specific you get, the better your spending and saving become."
Figuring out financial priorities and working toward them — a vacation, paying down credit card debt — is more effective than saying, "I'm going to save money and spend less." The psychological pull of a concrete goal is more powerful than vague statements about being smarter financially. When we spend money, the instant gratification reinforces spending. Reaching your savings goal needs its own tangible reward to give us the same kick.
It's also important not to commit to drastic spending changes.
"Crash diets usually end up at the buffet," Boudreaux says. "Spending works the same way. It's not really a logical, mathematical process because there are psychological processes at work."
Denial, pressure, shame — when we don't meet our goals or we make financial mistakes, these emotions activate a negative feedback loop in our brains and don't help us make better choices. Treat yourself with compassion when learning new spending habits.
Boudreaux's first step to financial fitness is to develop a tracking system. Websites and apps such as YNAB.com connect bank accounts and credit cards so users can see all their spending in one place. The app imports each transaction and users can categorize each expense. It's a streamlined way to learn about your actual spending habits and establish a baseline for where your money goes. Check it at least weekly, and scrutinize each purchase, he says. Think about that last transaction from Amazon — do you feel good about that choice, or did you forget what you purchased already? Once you have these conversations with yourself, you'll start to make different spending decisions and real progress toward your goals.
If you want to ...
... Pay off personal debt
Try to reduce the cost of the debt first, Boudreaux says. If your credit score is solid, you may be eligible for an interest-free balance transfer to rid yourself of high interest rates on credit card debt.
Most private student loans can be refinanced for a lower interest rate, potentially saving thousands of dollars over the course of repayment. Certain federal student loans are eligible for loan forgiveness if the loan holder is employed by a nonprofit.
"Nonprofits are pretty broad in New Orleans," he says. "Most hospitals are nonprofits, and everyone from the janitors to the physicians would be eligible. It's really important to find out if you're on track for that."
When you're ready to tackle the payments, it's all about "snowballing your debt," he says. "Start on the smallest balance first and chip away at it. When that one is paid off, it activates the success cycle in your brain."
... Save for a down payment on a house
"First, think about what makes a home, not a house," Boudreaux says. "It's psychological — it's not really about money. Is it so you can have a yard for your dog, or start a family?"
Once you've established what you want and why, find out what you can afford. Before you fall in love with a property at an open house, check your credit (every citizen is allowed one free three-bureau credit report annually; check out AnnualCreditReport.com) and address incorrect information immediately. It can take a while to get discrepancies sorted out. Keep tracking your spending to see what kind of mortgage payment you can afford. Don't forget to account for principal, interest, taxes and insurance. Once you've got a firm number in mind, you can start to save.
"Make sure you start with the 'why' first," Boudreaux says. "If you start on Realtor.com, you may get yourself into a situation where you're really constrained because you can't afford to do anything else other than pay your house note."
... Save for retirement
If your employer offers a matching contribution to a retirement plan, contribute at least enough money to get the match.
"It's free money and a guaranteed return on your investment," Boudreaux says.
If you don't have an employer-sponsored retirement plan, open a Roth IRA — payroll contributions are added after taxes, but deposits are tax-deferred and some withdrawals are tax-free in certain situations. There's a lot of flexibility in how you can use the funds as well. Contribute as much as you can.
"Do something, and then do some more," Boudreaux says. "Start with what you can and then increase by 1 percent of your budget. Depositing lump sums like tax returns will also go a long way."
Keep investment expenses as low as possible.
"There's a lot of things we can't control with investing," Boudreaux says, "but we can control how much you spend to invest. Companies like Vanguard ... offer low-cost portfolios."
Boudreaux also recommends investing in a company where you can keep all your funds (retirement accounts and investments) together, so you can manage and learn about your money easily.
... Be prepared for medical expenses
Qualified high-deductible insurance plans are eligible for health savings accounts. Payroll contributions into these accounts are made before taxes, subsequent deposits are tax-deferred and withdrawals are tax-free when used for medical expenses. After age 65, you can use the money however you want.