If you are feeling financially exhausted from a volatile 2001 and are slowly coming down from the holiday buzz, rest assured you are not alone.
With consumer debt at a record estimated $1 trillion, personal bankruptcy filings at an all time high, and mounting unemployment rolls, like millions of Americans, your New Year's resolution may be to save more, spend less and get rid of your debt.
Resolving to get your financial house in order in 2002 sounds great but by the end of January, at least 50 percent of average Americans will have abandoned their resolutions and up to 90 percent will have abandoned them by the end of the first quarter.
While many look to New Year's traditions like eating black-eyed peas or consuming donuts (as the Dutch do) for good fortune, the road to financial success takes work. Consider the following strategies as you embark upon having a more prosperous New Year.
Know What You Owe. If you are one of millions of Americans who charged an estimated $121.4 billion to major credit cards this holiday season, you are probably not feeling very jolly this New Year. Before you think about saving or taking care of other debts, get rid of these financial burdens first because major credit cards carry some of the highest interest rates around.
The average American household has $8,523 in credit card debt and about 12 credit cards. To get a handle on your own credit card debt, the first thing to do is collect all your credit card bills together and add them up.
Looking at the total amount due to all of your creditors can provide a much needed wake up call to get you out of debt. To downsize this debt, if you usually pay the minimum amount due, try paying two times the minimum. In so doing, you will shave years off your repayment schedule and save a considerable amount in interest.
By paying only the minimum on America's average of $8,523 in credit card debt, it would take 15 years to pay off the balance and ultimately cost an additional $5,184 in interest.
However, by doubling the minimum payment, the original $8,523 balance would be paid off in 5 years and 10 months — more than 9 years faster — and the interest paid would be $1,976 to a $3,208 interest savings.
Ideally, while freeing yourself of credit card debt, wean yourself from future credit card usage. To that end, only make purchases you can afford at that time. To do so, consider old-fashioned cash as the rule, a debit card tied directly to your bank account, or use a "charge" card, like American Express, which requires the monthly balance to be paid in full.
Take Stock of Your Investments. Examine your investment portfolio, know what you own, and know how these assets are performing. If you are not currently enrolled in a retirement savings plan or 401(k), like 20 percent of your fellow eligible Americans, consider enrolling.
If you are participating in a company sponsored 401(k) plan, now is an excellent time to do a check-up and examine your allocation, confirm your account value and potentially rebalance for continued portfolio diversification. In light of the recent Enron debacle, where thousands of Enron's employees lost their jobs and much of their 401(k) savings when their retirement plans collapsed along with the company's stock, take a look at your own plan to determine how broadly you are investing.
Mellody's Math: With contribution allowances rising in 2002 to $11,000 a year, maxing out your 401(k) can set in motion a secure and fruitful retirement. In 2000, the average American contributed $3,806 to their 401(k) plan. If you are not currently maxing out, increase your contribution as much as you can going forward. If you cannot get to the max, try to put away a little more each year than in the previous one.
The average 401(k) participant saves between 4.3 percent and 6.4 percent of their pre-tax salary in their 401(k) plan. Most employers match or add contributions to participant accounts. On average, for every dollar you contribute, employers will add 50 cents (up to 6 percent of pay). This results in an immediate 50 percent gain on your savings.
Save Your Raise. If you are fortunate enough to receive a raise this year, pretend you did not and hold your 2001 expenses steady. In so doing, your lifestyle will not change and you will be able to save more money for your future. Put this added compensation toward outstanding credit card debts or put the extra cash into your 401(k).
Mellody's Math: For example, if like most Americans, you contribute $3,806 a year to a 401(k) plan, adding another $1000 annually — about $20 a week — would grow to $535,458 after 25 years (assuming a 10% return). That is $111,410 more than if you invested only $3,806 a year.
Get Smart. Invest in your financial education. Subscribe to one financial magazine, newspaper (i.e. the Wall Street Journal or Barron's) or read one comprehensive (yet understandable!) investment book. Savvy investors do not get as easily rattled during periods of market volatility and are more knowledgeable when dealing with financial professionals. The key to this is to think of the reading material as "perishable"-the magazine or newspaper is good only for that day, week or month that it is dated. Put an expiration date on your reading and read it now because that elusive "later" date often never comes.
Bottom Fishing. Consider looking at last year's losers for some potentially rewarding investment ideas. This is the essence of buying low and selling high. For example, in 2000 the consumer cyclical sector (stocks like American Greetings, Hasbro and The New York Times) performed quite poorly, down 20 percent. In 2001, however, this same sector was up 13 percent. Similarly, avoid the so-called "hot" sectors in making investment choices for 2002. The utilities sector, for example, was up 59 percent in 2000 and down 30 percent through last Friday.
Will It. Set up a will. According to Nolo, a for-profit organization providing legal materials and guides for the public, 70 percent of the American public does not have a will. However, office supply stores and a number of sites on the Internet make it easy to purchase standard, inexpensive, legally binding will kits. In some instances, without a will, your state can control your property when you die, leaving your friends and family to undergo lengthy appeals to get it back.
Expense Reports. Know your fixed expenses. Everyone has essentials in their budgets they cannot live without. You need to be familiar with your expenses and distinguish those that are discretionary from those that are non-discretionary. For example, food, housing and transportation generally fall into the non-discretionary category.
However, within these expenses are degrees of discretion that can ultimately increase or decrease your cash flow. For example, food is a non-discretionary expense because you need to eat yet, discretionary spending comes into play when choosing between filet mignon and hamburger. Ask yourself, can I carpool or take the bus to work instead of driving?
Simply exercising degrees of discretion will ultimately increase your cash flow. Knowing these fixed costs will determine the true discretionary income you can allocate to such endeavors as fashion, travel and leisure. To ensure a sound financial future, think of investing as non-discretionary income.
Organize. Buy a simple accordion file to keep track of all your bills and help you follow when they are due and when they are paid. Many come with pre-set categories like utilities, auto, and mortgage to make it easier to manage. This upfront organization ultimately saves time and money. At the end of the year, this simple filing system also allows for you to track your overall spending and obtain a firm grasp on your financial picture.
Mellody Hobson, president of Ariel Capital Management in Chicago, is GoodMorning America's personal finance expert. Click here to visit her Web site, Ariel Mutual Funds.com. Ariel associates Matthew Yale and Anne Roche contributed to this report.