Buzz
While goals like saving for your children's college or preparing for retirement can take years, there are financial milestones you can achieve in just a year that will have a meaningful impact.
Begin by clearly defining what you aim to achieve within the next 12 months. Personally, I’m focused on building my emergency fund and setting aside money for a vacation. Your goals might include improving your credit score, saving for retirement, or simply becoming more financially literate. Whatever it may be, write it down, schedule it, or leave a note in your calendar.
Once you've set your goals, it’s time to take actionable steps. Below are a few ways to get started.
Boost Your Credit Score
Having good credit can help you secure better rates on mortgages and auto loans, potentially saving you thousands of dollars over your lifetime (or simply securing lower interest rates on your credit cards).
Improving your credit score in a year is achievable, though challenging, especially if you already have a high score. To start, you need to understand the factors that influence your score* as follows:
Payment history: 35%
Amount owed: 30%
Length of credit history: 15%
New Credit: 10%
Types of credit used: 10%
*FICO score
This means the most significant factor is your payment history. It’s important to pay the full balance, rather than just the minimum amount, as doing so could help you avoid debt and extra fees. If you don’t already pay on time, your credit score may improve after consistently making timely payments for six months.
The second factor—amount owed—can be tricky. It’s based on your credit utilization, or how much of your available credit you use. Experts suggest keeping your usage below 30% of your credit limit, regardless of whether you pay it off in full each month, to optimize your score. For example, if your credit limit is $1,000, aim to keep your balance below $300 at any given time. If you have multiple cards, the goal is to keep the total usage under 30% (or ideally, 10%) of your combined credit limit. You can achieve this by either being cautious with spending, making small payments throughout the month, or requesting a credit limit increase.
The length of your credit history refers to the average age of your accounts and how long it’s been since you last used them. While this is mostly out of your control, it’s one reason why parents may add their teens or college-age children as authorized users on their credit cards.
The fourth factor evaluates how many new accounts you open at once (opening multiple accounts, especially store credit cards, can harm your credit) and the fifth looks at the diversity of your credit, such as mortgages, student loans, car loans, etc. A mix of credit types is beneficial, but don't take out a mortgage just for the sake of improving your score.
In addition to understanding your score, you should review your credit report (you're entitled to a free report annually from each of the credit bureaus—Equifax, Experian, and TransUnion). If you find any errors, dispute them by contacting the bureaus directly. You can use the letter template provided by the Federal Trade Commission. The bureaus are required to respond within 30 days.
Increase Your Savings
Recently, we've discussed a lot about saving here on Two Cents. Especially for those working in the gig economy, building up savings is essential for gaining more flexibility. You might need a financial cushion if you're moving for a job opportunity, starting your own business, or if you lose your current job. Now is the perfect time to start saving.
One simple way to do this is by setting up an automatic weekly transfer (or setting one for each paycheck) and then forgetting about it. If you already have one, try increasing it by $5. You won’t miss the extra amount—I set up a weekly transfer two years ago and only remember it when I write about it.
Another option is to take on a savings challenge, like the 52-week challenge that Mytour previously mentioned.
You could also use an app to save on your behalf.
Save More—Especially for Retirement
If your employer offers a 401(k), consider increasing your contribution by 1 or 2% this year (up to $18,500 in 2018, plus an additional $6,000 if you're 50 or older). For the self-employed, opening an IRA (or Roth IRA) is a good option. If you already have one, consider upping your contribution as well.
Review your fees. Here's a helpful table from NerdWallet showing how small fees can add up over time. For instance, NW discovered in a separate article that a 1% fee could cost a 25-year-old over $590,000 in 40 years of saving. It's important to start saving early so your money can grow, but also keep in mind that fees grow over time too.
(Haven’t started investing yet? Check out our beginner guide to get started.)
Spend an Hour With a Fee-Only Financial Planner
Did you know not all financial planners/advisers are legally bound to act solely in their clients' best interests? This means they could sell investment products that provide them with a commission, even if a similar product exists with no fees. That’s why fee-only financial planners are so valuable.
These professionals (not to be confused with “fee-based” advisers) are bound by a fiduciary duty to prioritize their clients’ best interests and cannot accept commissions for the products they recommend. They offer thorough financial advice and can finally settle the question of whether you should focus on saving more or paying off your student loan debt.
The fee structure varies depending on the planner. Some charge by the hour, others use a retainer fee, or take a percentage of assets. You can find one here.
Safeguard Your Identity
If you haven’t taken steps to secure your personal information and protect yourself from identity theft, what are you waiting for—a bigger data breach?
You can’t afford to put it off. Here are a few simple actions you can take:
Place a fraud alert on your accounts
Freeze your credit across all three bureaus, unless you’re planning on buying a home, car, or something similar soon
Consider paying for identity theft protection services that monitor loan applications in your name and activity on the dark web
Read Some Books
Of course, keep reading Two Cents, but there are also some insightful books that delve deeper into topics and offer invaluable guidance. Here are a few of my favorites:
A Random Walk Down Wall Street by Burton Gordon Malkiel and The Index Card by Harold Pollack and Helaine Olen were frequently recommended by my colleagues when I worked at Money Magazine, and these books provided me with a wealth of knowledge as an aspiring personal finance writer.
American Sickness by Elizabeth Rosenthal is an engaging read that explores why the U.S. health care system is broken. It also offers valuable tips for cutting and negotiating costs.
Kids These Days by Malcolm Harris offers the most comprehensive and empathetic explanation of how millennials are struggling in the modern economy.
You Need a Budget by Jesse Mecham is an excellent beginner's guide to understanding your financial priorities and creating a budget. If you already know YNAB through Mecham’s website, you may not need the book—but for those who prefer physical books or need a gift that will help someone save money, this is a great introduction to managing money responsibly.
