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Experts weigh in on how to fulfill this critical financial New Year’s resolution
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When it comes to the debts of American households, statistics are nothing but grim.
Non-housing debt was up to $3.95 trillion as of Q3 of 2018 as aggregate household debt balances increased for the 17th consecutive quarter, according to Federal Reserve data. As of September 2018, Americans carried $1.041 trillion in revolving debt, much of which is made up of credit card debt.
As national debt balances continue to rise, you may be wondering if you could become the exception and not the rule. If you could only get your money straight, perhaps you could pay off your debt, start saving money each month and buy yourself some breathing room.
In 2019, you may be pondering a New Year’s resolution that could change your finances forever. Is this year the year you will finally get out of debt — or at least set yourself on the path to a debt-free lifestyle down the road?
Why do New Year’s resolutions fail?
While there are a ton of statistics on the failure rate of New Year’s resolutions, it’s hard to know just how many resolutions fail to stick. But since most Americans are neither thin nor rich, it’s easy to estimate that a large percentage of resolutions don’t make it much past February or March.
According to Leslie H. Tayne, financial debt resolution attorney and author of “Life & Debt,” there are several reasons even the best-intentioned financial goals are never achieved. Not only is paying off debt not as easy as it seems, but “old habits die hard,” she says.
You must be willing to alter your financial behavior for the long haul for real change to evolve, whether that change involves using a monthly budget, using debit or cash instead of credit or simply telling yourself “no” more often. Some research notes it could take 66 days for a new habit to form, and many don’t have the discipline or desire to do something difficult for quite so long.
Another problem with debt resolutions is many people focus on vague goals that are not easy to achieve or measure.
“If your resolutions are something vague like ‘save more’ or ‘pay off debt,’ you won’t be as likely to hold yourself accountable because there are no specific action steps involved,” Tayne says.
Finally, Kimberly Cole of nonprofit financial counseling service Navicore Solutions says consumers who dream too big may be setting themselves up for failure.
“I think people often set goals that are too lofty,” she said. For example, someone with $10,000 in credit card debt might set a New Year’s resolution to pay it all off before the end of the year without realizing this goal requires a commitment of $833 per month toward principal without even counting interest charges. A goal might look good on paper, but that doesn’t mean it’s feasible or realistic to achieve.
See related: How to slay your credit card debt with ‘small wins’
“If your resolutions are something vague like ‘save more’ or ‘pay off debt,’ you won’t be as likely to hold yourself accountable because there are no specific action steps involved.”
However, a lofty card debt payoff goal could become manageable with a balance transfer credit card. Many balance transfer cards offer promotional 0 percent interest periods that can range from 12 to 21 months. Just keep in mind that balance transfers typically carry a 3-5 percent fee.
When your money dreams don’t come true
This is exactly what foiled Jason Butler’s plans to get out of debt over the course of a few years. Butler, who works as a financial aid counselor in Atlanta and blogs about his financial progress at The Butler Journal, graduated college with $20,000 in student loans in 2008 – right at the start of the financial crisis. From there, he spent a few years struggling to find full-time work that paid enough to keep up with his bills.
From 2008 to 2015, Butler let his student loans sit in deferment or forbearance and racked up some credit card debt. By 2015, he owed $72,000 and set an ambitious goal to pay it off by his 35th birthday in October 2018.
Paying off over $70,000 by your 35th birthday sure sounds great, but Butler failed to determine what that really meant. To get out of debt in three years, he would have to pay $24,000 toward the principal of his loans each year, not counting payments toward interest. That’s well over $2,000 per month — a figure he couldn’t keep up with based on what he brought in with his salary and his side hustle reselling items on Amazon.
Butler said he did get the total under $60,000 at one point, but then his car broke down and he was forced to take out another $8,000 loan. He also admits he never shook off some bad spending habits from his past. As of now, he still owes $66,000.
Butler is currently looking for a higher-paying job and trying to grow his side hustle to ratchet up his earnings even more. He also set a new debt payoff goal within the realm of possibility — paying off $20,000 in debt by December 2019.
“It will happen,” he says.
Setting resolutions that work
Butler’s failed journey out of debt isn’t anything new. Many of us try to get out of debt and fail over the course of our lives, or we pay off part of our debt only to succumb to poor spending habits or a surprise bill that ruins our plans overnight.
Still, experts say New Year’s resolutions or any other financial goal can work provided they are set up in a way that gives the consumer the best chance at success. If you’re hoping 2019 is your year to turn your finances around, here are some tips that can help.
Set SMART goals
Instead of setting goals that look good on paper, take time to establish some that are realistic to achieve. Cole says she counsels her clients to set SMART goals — goals that are specific, measurable, achievable, relevant and time-bound.
This means instead of setting an arbitrary goal to pay off $50,000 in student loans by “next year,” you would sit down and figure out how much debt you have, how much you can afford to pay each month based on your income and liabilities and how much you could feasibly pay off by a specific date.
The idea behind this strategy is you’re a lot more likely to stay on track if you know you owe a specific amount of money each month. Without a specific sum to pay each month, you have no way to measure your progress, and you may be setting yourself up to fail.
Use a monthly budget or spending plan
Cole also suggests using a monthly budget, a spending plan or both. This typically means sitting down with all your pay stubs and monthly bills and then figuring out how much you owe each month and to whom. From there, you’ll need to set limits for discretionary spending categories like food and entertainment. Of course, you’ll also want to pencil in some of your funds toward debt repayment each month once you have set a specific monthly goal.
“A spending plan is a road map that will guide us to becoming debt free,” said Cole. “If we can balance that budget without the use of credit cards, we can now work on paying them off each month.”
See related: Putting off the payoff: Why we carry balances on credit cards
Set yourself up for success
Financial advisor R.J. Weiss notes that many people turn their focus to paying off debt without confronting how they got there in the first place. For example, they might set a goal to pay off one credit card but continue using another without changing their spending habits.
If you really want to get out of debt, Reiss says you should make it as difficult as possible to go into debt. Cut up your credit cards if you must, or at least put them away in a drawer where you won’t be tempted to use them. From there, figure out a way to stick with your debt payoff plan that doesn’t involve more debt.
“One of my favorite ways to do this is with the cash envelope method of budgeting,” says Reiss.
With this strategy, you stop using credit or debit for discretionary spending categories like food and transportation and set aside a specific amount of budgeted money for those expenses in cash. You put the money in an envelope and spend it on food, gas and other categories until the money is gone. This will help you learn to live within spending limits and stop using credit as a crutch.
Build an emergency fund
Finally, Tayne says it’s important to build a fund that will help you avoid more debt if a surprise bill or loss in income threatens to throw your plans out of whack.
“The best way to avoid large disasters is an emergency fund,” she says. “Make it a point to put money away each pay period.”
Whether you’re able to save $100 per month for emergencies or $10, having an emergency fund to pull from when times get tough can be all it takes to help you avoid making your debt problems worse.
Make your monthly emergency savings automatic and part of your full debt repayment plan, and you will begin building a savings buffer over time. Also, make sure you put your emergency fund in a separate account so you don’t accidentally spend it on regular bills.
“Savings doesn’t have to be a dream,” said Tayne.
See related: 5 mistakes you should avoid after paying off credit card debt
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