Wednesday, January 4, 2017

3 Money Moves to Make in 2017

Being that we just rang in the new year I thought it would be appropriate to discuss a few ideas to help propel you forward into 2017. We've all heard the old adage "new year, new me" but it's my hope that this blog will give you real-life tips that will you allow you to start 2017 on the best financial footing possible.

#1 Pay Down Credit Card Debts
Yes, the holiday season tends to put a burden on all of us and more often than not we may make a few extra purchases on our credit cards that we wouldn't have otherwise. As I've discussed before the high interest rates associated with credit cards makes them a top priority as it pertains to your financial health. On average, a credit card will have an interest rate of 16% per year. This means, on a $5,000 balance you're paying $800/year just to carry that balance. There's no excuse to throw away $800 per year especially when you can redirect that money into other, more efficient areas. If you have no outstanding credit card debt then kudos to you but do consider other outstanding debts such as car and student loans and focus your time there. This was my reasoning for making this the first concept, I urge you to aggressively pay down any credit card balances you may have to start the new year off right.

#2 Open a Roth IRA
I hope if you've read some of my prior blogs you have done this already but I continue to meet new clients who still have not set one up yet. I want you to make this a top priority for 2017 and moreover I want you to make every attempt you can at maxing out your first years' contribution ($5500). Whether you have a 401k/403b or other savings plan at work is irrelevant this is something that absolutely needs to get done in 2017 if you haven't done so already. IRA's weren't always as important as they are today. While very few of us today are afforded the luxury of a pension plan, pensions did used to be the norm not so long ago. Once you couple your pension with your employer sponsored plan and social security most investors looked pretty good in retirement. Unfortunately most pension plans have disappeared and even if you do have one currently there's no promise that it will be around in 10/20/30 years when you retire, so please do not rely heavily on it. A Roth IRA is about taking your investments into your own hands with the freedom to select funds and diversify as you wish, so as to not be confined by the fund line up in your 401k plan. I've said it before and I'll say it again, this is a BIG deal and should be another top priority for you in 2017.

#3 Build Your Credit Score
Most people don't see it this way but your credit score can be a serious money saver when it comes time for you to finance a major purchase. While an 850 (perfect) credit score is certainly attainable it's far from necessary. The exact FICO credit score formula isn't certain but we do know the 5 categories that make it up.
  • Payment History (35%) - I know this isn't a shock to anyone but knowing that it constitutes more than 1/3 of your credit score should prevent you from making delinquent payments.
  • Amounts Owed (30%) - This is another big category and also one that I have a quick tip to share. The amounts owed looks at more than the total sum of all credit card payments due. It looks at the ratio of the amount you compared to the amount you're allowed to borrow. My tip is, open a few extra credit card limits that you don't plan to use (ones without annual charges) and cut them up. Why? This is a little trick that makes your ratio appear far more favorable than it would otherwise. This is because FICO sees that you have a total credit limit of $20,000 lets say, yet they also see that you never charge more than $2,500 a month. Now if you didn't have those extra cards opened up your credit limit may only be $10,000 making your ratio appear much less favorable. Do not go on an account opening spree though, you'll see why not further down.
  • Length of Credit History (15%) - This one is self explanatory and a factor that you have little control over. The longer you've been borrowing the better your rating will be in this category.
  • New Credit (10%) - This is determined by the amount of new accounts you open as well as how many you apply for. One or two inquiries won't do damage but if you're consistently opening new accounts or applying it could bring down your score.
  • Credit Mix (10%) - While many do not know this 1/10 of your score comes from the allocation of your credit. Student loans, credit cards, a mortgage and car loan could actually boost your score slightly as compared to only have one or two of those.

I hope that I've given you a few ideas that can help put you on firm financial footing for the coming year. Small changes are all it takes to break old habits and even something like putting $100 a month into an IRA could have a big impact on your financial health in the future.
credit: Matthew Frankel

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