The start of a new year is a good opportunity to embark on strategies to lower your debt, increase your savings and maximize your retirement portfolio even if you were not among the fortunate ones to receive a raise or bonus.
Ramping up the balance in your 401(k) or IRA while reducing your credit card debt and increasing your rainy day fund for emergencies can be achieved by paying fewer fees and taxes and devising a plan.
“Whatever your goals are for 2016 or beyond, you need a plan to get there,” said Jamie Hopkins, a retirement professor at the American College of Financial Services in Bryn Mawr, Pa. “This could start with a short term plan for the year and develop into a long-term plan for retirement.”
How to Decrease Debt
Lower and eliminate your debt, especially your credit cards by always paying on time and more than the minimum, said Andrew Housser, co-CEO of Freedom Financial Network, a San Mateo, Calif.-based debt resolution company.
“The first and best rule is to never charge more in any given month than you can repay that month,” he said. “Even adding just $10 to your payment or rounding payments up to the next $10 or $100 increment will make a huge difference.”
Spending less money means taking a harsh look at your budget and financial plan so you can “spot areas that you are overspending,” said Hopkins. Set aside a certain amount of money for savings with each paycheck you receive and saving at least 10% of your income is recommended.
“Another great way to spot areas you overspend is to look at your free year-end review that is offered by most credit card companies and banks,” he said. “This can show you where you spend your money during the year and help you reduce some of those expenses this coming year.”
Ways to Increase Savings
Reduce the amount of your health insurance premiums by quitting smoking since in many states, companies charge smokers more, said Nate Purpura, vice president of consumer affairs at eHealth.com, an online health insurance exchange based in Mountain View, Calif.
In 2015, smokers paid an average monthly health insurance premium of $311 while non-smokers paid only $272, according to eHealth’s data. If you can beat smoking this year, you may qualify for lower premiums next year.
Opening a flexible spending account, or FSA, gives you the opportunity to pay for medical, dependent care or transportation costs with pre-tax dollars set aside with every paycheck, said Greg McBride, chief financial analyst for Bankrate, the North Palm Beach, Fla. based financial content company.
Lower your taxable income by contributing to a health savings account known as an HSA, which you can open as long as your deductible is at least $1,300. Since HSAs mirror IRA accounts, you can save money by paying fewer taxes while also saving for medical expenses such as copays, deductibles or dental care, said Nate Purpura, vice president of consumer affairs at eHealth.com, an online health insurance exchange based in Mountain View, Calif. Any money you don’t spend will rollover like an IRA and can be another vehicle to increase your retirement savings.
“You can deposit money into your HSA until April 15, 2016 for the 2015 tax year,” he said.
Some estimates predict that the average taxpayer will overpay their federal income tax by $1,000 this year, which is “money being held without earning any interest,” said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C-based non-profit organization.
“If you have too much money being withheld from your paycheck for taxes, take time to adjust your withholding,” he said. “You will want to match the total amount withheld to the amount you will expect to pay when taxes are filed.”