How to Actually Improve Your Finances in One Year
Saving for your kids' college and retirement, reaping the rewards of the stock market-all of these things take years to accomplish. But there are financial goals you can accomplish in one year that can make a big difference, too.
First, figure out exactly what it is you want to accomplish over the course of the next 12 months. For me, it's
building up my emergency fund
and saving separately for a vacation. For you, it could be increasing your
Once that's done, you can actually take the steps to accomplishing it. Here are some starting points.
Increase Your Credit Score
Good credit can get you better mortgage interest/auto loan rates, which can save you thousands over a lifetime (or simply get you better interest rates on your credit cards).
Increasing your score in a year won't be easy (especially if you have a higher score), but it's possible. To do so, you need to understand how your score* is determined:
- Payment history: 35%
- Amount owed: 30% amount owed
- Length of history: 15%
- New Credit: 10%
- Types of credit used: 10%
This means the most important factor is whether or not you paid on time. And you should pay the full balance, not the minimum balance that they recommend (which can get you into debt and cost you more
The second factor-amount owed-is a bit more complicated. It's based on your credit utilization, or how much of your credit limit you use. Experts recommend using up no more than 30% of your limit-regardless of whether or not you pay it all off each month-in a given credit cycle to maximize your score. So, for example, if your limit is $1,000, you should try not to put more than $300 on your credit card(s) at any one time. If you have more than one card, you should aim for 30% (or better still, 10%) of the cumulative credit available. You can do this either by being frugal, by making small payments throughout the month to keep you under the limit, or by asking your creditor for an increased limit.
Length of history is fairly self-explanatory: It's the average age of your accounts, and how long it's been since you used them. This is one you can't really change, though it is one reason why parents might consider adding their teenagers or college-aged kids as authorized users on their credit cards.
The fourth factor listed above measures how many cards you open at once (opening multiple accounts-particularly store credit cards-hurts your credit) and the fifth measures your mix of credit: mortgage, student loans, car loan, etc. It's good to have a mix, but don't apply for a mortgage to boost your credit.
Beyond understanding your score, you should check your credit report (you are entitled to a free report from each of the credit bureaus-Equifax, Experian and TransUnion-every 12 months) for errors, and dispute them by contacting the bureaus. You can use this letter format provided by the Federal Trade Commission . The bureaus must respond to you within 30 days.
We've talked a lot about saving the past few days here on Two Cents. Particularly if you work in the gig economy, accumulating cash is a necessity to give yourself more freedom. You may need a cushion if you decide to move across the country for a job opportunity, or open your own business, or you lose your job. Now is the time to actually do it.
You could set an automated weekly transfer (or one each paycheck) and forget about it. If you already have that, increase it by $5. You won't miss the money-I set up a weekly transfer two years ago and I only remember when I write about it.
You could also do some sort of challenge, like the 52 week challenge that Lifehacker wrote about in the past.
You could use an app to save for you.
Save More-Specifically for Retirement
If you have a company sponsored 401(k), increase how much you're contributing by 1 or 2% this year (up to $18,500 in 2018 , plus an additional $6,000 if you're over 50). If you're self-employed, open an IRA (or a Roth). If you already have one, again, increase the amount you're contributing.
Check your fees. Here's a great table from NerdWallet on how seemingly small fees add up over time. For example, NW found in a different story that paying 1% in fees could cost a theoretical 25-year-old more than $590,000 over 40 years of saving. You want to start saving young so your money compounds, but remember fees compound, too.
(Haven't started investing yet? Read our beginner guide to get going.)
Spend an Hour With a Fee-Only Financial Planner
Did you know that not all financial planners/advisers are required to act solely in their clients' best interest? Meaning they can sell consumers investment products that they get a kickback from, even if there's another similar option available to the consumer that comes without the associated fee? That's where fee-only financial planners come in.
These professionals ( not to be confused with "fee-based" advisers) have a fiduciary responsibility to act in their clients' best interest, and cannot accept any compensation for the products they sell. They offer comprehensive financial advice, and can finally answer for you once and for all whether you, personally, should save a bit more or pay off your student loan debt.
The fee structure itself is dependent on the planner. Some charge an hourly rate, a retainer fee, or a percentage of assets. You can find one here .
Protect Your Identity
If you haven't taken steps to protect your personal information and identity from theft, what are you waiting for-an even more massive data breach ?
You can't afford to wait any longer. Here are some basic things you can do:
- Put a fraud alert on your accounts
- Freeze your credit (at all three bureaus) unless you're going to buy a home, car, etc. soon
- Consider paying for identity theft protection services , which track loan applications made in your name as well as activity on the dark web
Read Some Books
Obviously you should continue reading Two Cents, but there are also some great books that go more in-depth than we can here and offer invaluable insight. Here are some I like:
Random Walk Down Wall Street
by Burton Gordon Malkiel and The Index Card
by Harold Pollack and Helaine Olen were often recommended by my colleagues when I worked at Money Magazine , and I learned a lot from these books as a fledgling personal finance writer.
by Elizabeth Rosenthal is an engrossing read on just how and why the health care system in the U.S. is so messed up. It also offers some solid tips on cutting and negotiating costs.
- Kids These Days by Malcolm Harris explains the many ways millennials are screwed in the modern economy in the most comprehensive and understanding way I've read so far.
- You Need a Budget by Jesse Mecham is a great beginner's guide to figuring out your priorities and actually creating a budget. If you're already familiar with YNAB through Mecham's website , you may not need the book-but for those who prefer paper to screen (or are looking for a holiday gift that will save the recipient money), the book is a great introduction to responsible money management.