We are all aware that the resolutions we so earnestly make for the New Year are likely to be broken in two weeks. In fact, there is a movement to crown January 17th “Ditch Your Resolution Day.” So why even talk about resolutions at all? It is because, to quote Socrates: “An unexamined life is not worth living.” Resolutions, at the very least, cause us to reflect on our past year and evaluate ways to improve ourselves over the next twelve months. The exercise of examining our past is worth it, even if our odds of keeping to resolutions are only 8%.
So, as this is a financial column, here is one resolution to consider for 2014: Lower your debt. Easier said than done. So here are some helpful tips.
Review how much you owe: Most of us have debt scattered around many institutions, with mortgage and student loans, lines of credit, and credit cards. As a first step, catalog all your debts, using bank and credit card statements. You will be amazed how much you owe when you add it all up.
Be specific about your goal to reduce your debt: Are you going to reduce debt by 5%? 10%? A certain dollar amount? Having a goal makes it easier to plan out how you will get there.
Examine how you accumulated that debt: Did you get into debt due to circumstances outside of your control, like medical emergencies? Did you bite off more than you could chew on big-ticket items or many small purchases that added up over time?
Reduce spending: If your debt is from buying big-ticket discretionary purchases, resolve to save up for those items before buying them, just like grandma did. If your debt is from many small purchases, it will take more analysis. Track those expenses by category, like home, groceries, clothing, gas, dining out, etc. Again, being aware of where your dollars go is an education in and of itself. Armed with that knowledge, you can make the adjustments you need to your spending. The ultimate goal is to get your purchases down, so you can pay off your credit-card balance in full every month.
Consolidate your debt: Once you have stopped increasing your debt by reducing your spending, you can focus on getting to your goal of paying down your debt. Depending when you originated your home mortgage, chances are rates are lower now, and home values are up. So consider refinancing at the lower rates being offered these days. You may also be able to pay off your equity line of credit with the net proceeds of the refinancing, as interest on credit lines is typically higher than mortgage rates.
Consider consolidating your credit-card balances by transferring balances from credit cards with higher interest to lower-interest cards. Once you have consolidated your credit card balances, cancel the cards with high interest rates. This acts as a spending discipline and serves to raise your credit score as a bonus. If you cannot consolidate, focus on paying off high-interest balances first, while paying minimum amounts on the lower-interest cards, until you get caught up.
And if you reach your debt-reduction goal, congratulations! You will be among the few and the proud 8%.
Ina Fernandez CPA is Managing Director of Liberty Capital Management, Inc.