Don't be a victim of financial amnesia
In December the National Foundation for Credit Counseling (NFCC) polled consumers on their personal predictions for 2014. More than half of the respondents, 56 percent, predicted that they would be in a better place financially at this time next year.
That kind of optimism is a great sign that our economic outlook is improving, but optimism alone isn’t enough to actually improve your finances or your life. You should be on guard against financial amnesia, allowing your optimism to blot out the financial mistakes and missteps you’ve made in the past. The easiest way to prevent a repeat of past mistakes is to be proactive and make a plan to achieve the improvements you want to see in 2014.
If one of your improvements for 2014 is reducing your debt, take the time to build a comprehensive financial plan, including the following often forgotten or ignored areas.
- The unexpected. It’s usually not the daily routine expenses that will wreck your budget, but the emergencies. Prepare for these by socking away 10 percent of each paycheck into a rainy day fund. At the end of a year, it will total more than one month’s income, enough to cover most short-term emergencies.
- Long-term savings. Protect against serious set-backs such as job loss. Even though the unemployment numbers are improving, no one is immune to job loss. If the unthinkable happens, bridge money will be needed to help manage daily expenses and existing debt obligations. Without it, people frequently resort to living off of credit cards, often amassing an unmanageable amount of debt. Experts recommend having a minimum of six months income as a cushion. Since it takes quite a while to build up this amount of money, now is the time to start saving toward this goal.
- Known periodic expenses. Birthdays, anniversaries, holidays, vehicle tags, and quarterly insurance premiums are examples of expenses that occur at the same time each year. In spite of being able to anticipate these expenses, many people neglect to set aside the money necessary to satisfy such events.
- Household and vehicle maintenance. Things are going to break, and usually at the worst possible time. Without a plan to cover the expense, people are left with only poor choices: use money earmarked for a higher priority such as the rent or mortgage; charge the expense and add to an already burdensome debt load; or borrow from family or friends, potentially putting those relationships at risk.
- Travel. Whether it is a family vacation, an out-of-town funeral or wedding, or sporting events for the kids, traveling costs money. Try to anticipate as many of these events as possible, and work the cost into the budget.
- Major purchases. Buying a home, purchasing a vehicle, remodeling the house or that long-awaited state-of-the-art entertainment, are examples of expenses that need to be considered and planned for.
- Charitable giving. Being generous is a virtue. However, being generous to a fault isn’t. Review previous giving patterns to estimate 2014 donations.
- Health insurance choices. Recent changes will potentially have a major impact on a spending plan. In addition to medical insurance, account for anticipated dental and prescription drug needs in the budget.
- Investing. Time is money’s best friend, particularly for those with a long time horizon. Regular, disciplined investing is a critical part of long-term wealth building.
- Debt reduction. Instead of allocating minimum monthly payments into the budget, set a date by which all current credit card debt will be eliminated. This step will free up money to go toward satisfying goals such as saving or investing.
A better 2014 is completely achievable, but the work of reaching that goal begins immediately. If you make a plan and stick with it, chances are good you’ll see that your optimism was well founded.