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Fine-Tune Your Finances

Dec. 29, 2011
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At NerdWallet, we’re all about the facts. That being said, we’re here to tell you that the ancient Mayan astronomers and your crazy aunt have no conclusive evidence that the world is going to end in 2012, and neither do you. Now that we’ve eliminated that from your list of excuses, it’s time to start thinking about your goals for the New Year. Yikes, do we sound like your mom? Sorry about that. To be honest, we think it’s always good to set goals, and the New Year is a great catalyst.

When planning for life after apocalypse, why not begin with a critical look at your wallet? After all, your money management plan affects every aspect of your life. But it isn’t always easy. To help you out, we’ll go beyond the basic “spend less” advice and provide you with some real strategies for improving your financial fitness in 2012.

Stop “panic selling” your stocks

Heard the NASDAQ is down? Relax. It’s never a good idea to sell (or buy) your stocks out of fear. If there’s no sound financial reason to mess with your portfolio, take a deep breath and wait it out. Many people make the mistake of selling poor performing stocks prematurely, only to see them rebound in a year or two. This might sound obvious, but the stock market is complicated. Like, really complicated. Even if you’re a broker by profession, you can’t possibly know all the factors that went into a price drop. Sometimes stock prices drop just because people are scared that they will. Self-fulfilling prophecy, anyone? Invest with your head, not with your gut. And if you have some time until you’ll need your 401(k) or 529, just ignore day-to-day oscillations. You’ll avoid mistiming the market, and save a bundle on high blood pressure medication.

Be cautious with debt, old and new

Debt isn’t all bad all the time. Sometimes you need a loan to buy a car or go to school. That said, always approach new debt cautiously. If you don’t absolutely need that extra money, if you’re not 110% sure you can make all your minimum payments on time, don’t borrow it. Don’t spend beyond your means. If you’re already in debt, do your best to get out ASAP. The longer you take to make your payments, the more interest you’ll rack up, and the more money you’ll spend over time. If you’re having difficulty making your monthly payments, you many want to consider consolidating your loans for a lower overall payment, but be careful! That immediate savings comes at a high price. In exchange for lower monthly payments, you’ll have to make them for a longer period of time, and end up spending even more.

Save for your retirement

It doesn’t matter if you’re 22 or 52; you need to be saving for your retirement. To do this, most people get an investment account suited for that very purpose, either an Individual Retirement Arrangement (IRA) or a 401(k). Whether you should get one or both depends on your income level and work situation. If you’re lucky enough to get a 401(k) through your employer, take it, especially if you’re eligible for matching funds. 401(k)s also have a high yearly contribution limit: $16,500 if you’re under 50 and $22,000 if you’re older.

For most people, we also recommend starting an IRA. As of 2011, you can contribute up to $5,000 a year ($6,000 a year if you’re over 50). An IRA is eligible for lower taxes than a 401(k), and it’s hard to withdraw money for frivolous spending – there’s a 10% penalty if you remove any money before you’re 59½, except in special circumstances. In any case, don’t count on Social Security or work benefits to pay all your retirement expenses. The currently retired generation can’t live comfortably on these benefits alone, and chances are us younger folks will have to settle for even less.

Get a digital budget

If you don’t already track your spending, start doing it. A latte here, a bag of chips there; it’s easy forget about our frivolous expenses, but they do add up. Tracking your budget doesn’t have to be time consuming. Skip the Excel spreadsheet and try a budgeting website or budgeting software instead. Many of these services are free, too. BudgetPulse and dsBudget are downloadable programs that require you to enter your own information, but have a variety of excellent calculation tools to help you plot your future spending goals. GnuCash is free budgeting software that doubles as accounting software for personal and small business use.

Check for your bank account for sneaky fees

Got an account with a big bank? You may be losing money to new fees. Sure, Bank of America didn’t get away with a $5 debit card fee, but like most banks, they’ve got plenty of new fees flying below the radar. Their MyAccess checking account monthly maintenance fee is now $12, up from $8.95. Chase raised their standard checking monthly maintenance fee to $12 as well, and Citigroup’s jumped from $8 to $10. In addition to old fees going up, you may see new fees for things like receiving paper statements or talking to a teller. TD Bank is now charging $15 for wire transfers and $9 for “excessive” savings account withdrawals. Re-read your terms and conditions and see what’s changed. Make a point to read any new mail from your bank, too. They’re required by law to tell you whenever they make a change to your terms, but you’re responsible for paying attention. Don’t like what you’ve found? Switch to a small bank or credit union to save money on fees.

Build a financial cushion

You know that expression “save it for a rainy day”? It’s cliché for a reason. If you don’t already have an emergency fund, it’s time to start building one. Ideally, you should put aside enough money to pay your expenses for 3 – 6 months. We promised not to sound like your mom again, so we apologize in advance: you just never know what life will bring. What if you get in a terrible accident or get sick? What if you lose your job? You’ll have plenty to worry about if the unthinkable happens. With a little advanced planning, you can make sure your finances aren’t one of them.

When you save, put the money in an account that gives you easy access and won’t depreciate in value, like a money market account or a high yield savings account. Try NerdWallet’s rates tool to find the highest interest rates on these types of savings accounts in your area. If you aren’t sure how much money you should allocate to saving, try the 20% payment plan. Originally suggested by the well-known businessman George Samuel Clason, this simple saving strategy works well for most income brackets. 20% of your monthly net income should be used to pay off debt, 10% should be put into savings, and the other 70% goes toward your regular monthly expenses. Contrary to popular belief, saving doesn’t have to be complicated.

Happy New Year from NerdWallet. Cheers to your financial health!