Six Tips to Put Your Financial House in Order
If you want to spend less time worrying about your money, then it’s time to get your financial act together. These six strategies can help improve your financial situation and simplify your life at the same time.
1. Put Your Savings on Autopilot
If you haven’t maxed out your 401k or other retirement plan at work, add an extra $50 or $100 every month. Increasing your contributions just a little can make a huge difference over time. By adding $100 per month when you’re 25, you’ll have an extra $330,000 in your 401k by the time you’re 65 if your investments return 8 percent annually, which is below the average long-term return for stocks. Since the investments are pretax, your $100 monthly investment will lower your paycheck by $75 if you’re in the 25 percent bracket. If your employer matches your contribution, you’ll get free money to help you save even more. And it’s the easiest way to save, since the money is automatically invested before you can touch it. If you’ve maxed out your 401k, invest $333 automatically every month in an IRA. Ask your IRA administrator to set up automatic payments.
2. Stop Worrying About Your Investments
Instead of poring over your investment options and wondering when -- and what -- you should buy and sell, have the experts do it for you. Most mutual fund companies, and quite a few 401k plans, now offer target funds that match your investments to your savings time frame. If you’re in your mid-30s, for example, you can invest your retirement money in a 2040 target date fund. This fund invests aggressively when you have more than a decade to go before retirement, then gradually gets more conservative as you approach retirement. These funds are diversified, so you don’t need to invest your retirement money anywhere else.
3. Pay Bills Automatically
Signing up to have your bills paid automatically from your bank account saves you monthly check-writing hassles and mail-delivery worries; it also protects you from costly missed deadlines. After one late payment, some credit-card companies boost interest rates beyond 31 percent and charge late fees of nearly $40. And some card companies raise your rate if you miss a deadline on another card, even if you have a spotless record with them.
4. Streamline Your Files
Go through your financial files and toss what you don’t need. In general, you should keep your tax returns forever, but you can get rid of supporting documents after three years (six years if you have self-employment income). You can also get rid of monthly investment statements after everything matches with your year-end summaries and ATM receipts as soon as the transactions appear on your monthly bank statement.
5. Protect Your Identity the Simple Way
Instead of signing up for expensive services that monitor your credit records for identity theft, do it yourself for free. You can now get a free copy of your credit reports from each of the three bureaus (Equifax, Experian and TransUnion) every 12 months. Stagger your requests so you get one report every four months. Review each one carefully for errors or unauthorized charges.
6. Get Out of Debt
The best thing you can do to improve your financial health is eliminate high-interest debt. Try to use any bonus, raise or tax refund to pay off credit cards in full. Even adding a few hundred dollars to your payments can make a huge difference, especially if you can get your credit card company to lower your rate. If your minimum payment is 4 percent of your debt, a $5,000 balance with an 18 percent interest rate would start with a $200 monthly payment, which would take 32 months to pay off and cost $1,314 in interest. If you pay $500 per month on a 5 percent card, you’ll cut your interest charges to $118 and pay off the balance in just 11 months.
How does this simplify your life? Once you’re out of debt, you won’t have to juggle minimum payments, and you’ll save a ton in interest, which frees up extra cash to reach the rest of your financial goals.