CHARLOTTE, N.C., December 27, 2004 -- If you're suffering a financial hangover from the holidays, use your year-end pain to spur yourself on to better habits. Here, LendingTree.com Chief Consumer Officer Ed Powell offers five New Year's resolutions that can help you become a smarter borrower in the coming year, or, at the very least, inspire you to come up with solutions of your own.
- Consolidate your debt. Don't put off consolidating a second mortgage or paying down credit card debt with a cash-out refinance or home equity line of credit. The Federal Reserve has proven its commitment to raising interest rates, with five rate increases since June, which generally increases the cost of some forms of consumer debt.
- Throw away your excess credit cards. Think of it this way, if you've got a credit card with a $10,000 balance and a 20% interest rate, you're paying $2,000 per year in interest alone. Credit cards can be a very expensive form of debt, and that $2,000 in interest is just money out the window. Once you've paid off your cards or consolidated the outstanding balances, consider cutting them up. And don't forget to take the extra step of closing those accounts. Your best bet as a smart borrower is to create a budget and savings plan for expenses like holidays, vacations, etc. Use less expensive forms of credit, such as a home equity loan or line of credit, to handle unanticipated expenses like a leaky roof or broken refrigerator.
- Create a budget. Sit down and make a list of all the bills you pay, from utilities to car loan installments, plus your cash expenditures on lunches, groceries, gas, savings and so forth. Calculate the average monthly cost of each item on the list. Compare the total to your net monthly income (your gross income from all sources less taxes and other payroll deductions). Your net monthly income should exceed your monthly expenses, or you must make some spending adjustments to make sure your bills and savings are covered.
- Save for a rainy day. Create an emergency fund of cash that covers three to six months of your living expenses. The amount you save depends on your personal financial circumstances and monthly bills. As an example, a household making $50,000 a year should sock away at least $12,500 in cash or liquid assets, or approximately three months salary, as an emergency fund.
- Plan for the future today. Increase your contributions your 401(k). In 2005, the max contribution for 401(k) savings plans increased to $14,000, and if you are 50 years or older you can contribute up to $18,000. Stick to your new budget and watch your savings grow.