Now that the champagne bottles have been recycled and auld acquaintance has been forgot, it’s time to actually get started on those resolutions. Whether your 2012 goal is to pay down your debt, get your credit score up or just put aside some money in a savings account, you’re going to need a long-term strategy to stick with it. Here’s a short quiz to help you determine the best way to achieve your 2012 goals.
Special thanks to Professor Ben Ho, who specializes in behavioral economics at Vassar.
Nerd Your Resolutions!
Keep a count of your answers.
Part 1: How do you approach difficult tasks?
1. When I’m trying to accomplish something difficult:
a) I need milestones so I feel like I’m making progress
b) I’m okay knowing that I’m making progress, even without milestones
2. When I face a seemingly overwhelming problem, I:
a) Break it down into small chunks and try to attack it piecewise
b) Get organized, make a holistic plan of attack and dig in for a long effort
3. If I have a certain amount of unpleasant work to do:
a) I’d rather do small amounts over a long time.
b) I’d rather do large amounts over a short time.
4. I need support and motivation from my friends and family:
a) Pretty frequently: if someone isn’t on my case, i don’t get things done
b) Pretty infrequently: I rarely need external motivation
Part 2: How do you approach goal-setting?
1. When I’m establishing a new habit, it takes me:
a) A relatively long time before it becomes ingrained
b) A relatively short time before it becomes ingrained
2. I usually stick to my New Year’s resolutions for:
a) Six months or less
b) More than six months
3. I find myself giving up:
a) Often or sometimes
b) Rarely or never
Part 3: How do you approach money?
1. I’d rather get:
a) $100 every month for a year
b) $1,300 at the end of the year
2. I put away some of my money into savings…
a) Only if I’m in the habit
b) Whenever I have some cash to spare, even if I’m not in the habit
a) Often or sometimes
b) Rarely or never
Reward Early and Often: Stay committed
If you have trouble sticking to your goals and establishing new habits, you’ll have to address your personality first and your finances second. Your long-term goal, of course, is to pay down debt, save money and establish a solid financial state. however, in the short term, you should break this overarching goal into bite-sized chunks, giving yourself the feeling of accomplishment you’ll need to move forward. Here are some strategies to make sure that you’re as diligent in June as you are in January.
The “debt snowball” strategy has you list all of your debts on all of your accounts and pay them off from smallest debt to largest, regardless of interest rate. (Of course, make the minimum payments on all your debts first; the debt snowball theory guides what to do with the leftovers.)
For example, let’s say your debts looked like:
Student loans: $4,000
Low Interest Credit Card: $5,000
Rewards Credit Card: $10,000
If you were to rank them from highest interest rate to lowest, it may look like: rewards credit card, low interest credit card, student loan, mortgage.
However, instead of paying them off from highest APR to lowest, you pay them off from smallest amount of debt to highest. In this case, you’d pay off your student loans first, then your low APR credit card, then your rewards card, then your mortgage.
The satisfaction of paying off a debt completely is enough to keep you going and tackle the bigger debts. The “debt snowball” theory may mean that you pay more in interest overall, but the periodic affirmation may be just what you need to stick to your plan.
Saving part of your income doesn’t always make financial sense. For example, if you put money into a savings account rather than paying off your debts, you’ll pay more in interest than you earn in yields. But just because it doesn’t make financial sense doesn’t mean it’s without value: getting yourself in the habit of saving will pay large dividends down the road. Commit to a sustainable savings plan: the often-cited rule of thumb is to save 10% of your paycheck, but given the dire straits that many retirees are in right now, you may be better off setting aside 15%.
Have a portion of your paycheck deposited into a savings account rather than a checking account, if possible, or have it put into a retirement account. Try to automate the process of saving as much as possible, putting in safeguards against flagging enthusiasm later on.
One of the best ways to do this is to bank with ING (note, though, that ING is entirely online – no in-person checking is available). ING lets you open up to 25 savings accounts, so you can designate one for rainy days, one for holiday spending, one for a vacation, and so on. The ING Automatic Savings Plan lets you regularly transfer a certain amount of money from your checking account to a high interest savings account. Using different savings accounts helps you with goal-setting; setting up an automatic transfer to savings helps you get in the habit of putting money away.
(For the record, we don’t have any financial relationship with ING and aren’t affiliated with them at all. Though if anyone from ING is reading this, we wouldn’t say no to some free coffee from one of your cafes…)
Sticking with it:
Peer pressure can actually be a good thing. If you need reinforcement (positive and negative) to keep you on track, you don’t have to look any further than your friends and family. To improve your chances of staying on track:
- Tell people about your goal. A lot of them. Friends, enemies…rivals in particular make excellent motivation.
- Ask someone to check up on you. Set up weekly progress checks with someone else who’s set a goal for him- or herself, so each of you is accountable to the other.
- Use a goal-setting site like Stickk.com to help you stay on track.
Remember: accolades help! Ensure early on that you’ll receive regular rewards for doing well.
Divide up your financial goals so that you’re not overwhelmed. Yes, saving and debt management do interact to a large degree, but both tasks seem more manageable if you compartmentalize them rather than lumping them into the giant melting pot of financial health.
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Just Do It: Stay engaged and adjust your course as needed
You don’t need to worry as much about the psychological aspect of financial fitness – you’re good to go as you are! Your goal is to minimize the amount you pay and maximize the amount you earn. This requires looking at your finances in a holistic way, rather than dealing with your debt, savings and spending habits separately.
Remember that there’s nothing inherently wrong with debt. If taking out a $1,000 auto loan means you can travel to your job and earn an extra $500 a week, it’s a great decision. That said, don’t take out debt that you’re not sure that you can repay. if you do have some debt you’re carrying, list out your debts and their interest rates. Your list might look like this:
Mortgage: 3.1% APR
Student loans: 8.1% APR
Low interest credit card: 10% APR
Rewards credit card: 17.9% APR
After you’ve made your minimum payment on all your debts, pay them off in order of highest interest rate to lowest. In this case, pay off your rewards card first, then your low APR card, then your student loans, then your mortgage, regardless of how much debt you have on each account. This minimizes the interest you accrue overall.
Saving is almost always a good idea, but you can afford to be more flexible about when and how much you save. In today’s terrible savings climate, you’re almost always better off paying down your debts rather than saving. You’re lucky if you’re getting a 2% return on your savings, but depending on the type of debt, you might be paying out 2-10 times more in interest. Since you can pick up saving again whenever you’re in a good financial place, make sure you’re debt-free before you start stocking money away.
Saving for college, retirement or just a rainy day is a hallmark of financial health. But don’t forget to look at your finances holistically: a robust savings account doesn’t do much if you’re deeply in debt.
Sticking with it:
Stay engaged! Social support might not be strictly necessary for you, but it never hurts. Tell your friends and family about your financial goals for the new year. Compete with a friend with similar goals: who can keep their financial house in order the longest?
Make sure that you’re an active participant in deciding where your money goes. Having a portion of your paycheck deposited into a savings or retirement account is all well and good, but taking a hand in choosing your retirement plan and so on helps you feel like you’re guiding your life rather than slogging through it.
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