Mellody Hobson: 5 Tips to Get Fiscally Fit

Jan. 9, 2007 — -- According to a recent poll by Money magazine and ICR, an estimated 77 million Americans say their New Year's resolution is financially related.

Yet, only one in four people who have made such promises actually keep them.

With help from "Good Morning America's" financial contributor Mellody Hobson, though, you can whip your finances into shape.

Best Resolution? Tackle Credit Cards

First and foremost, Hobson says, you should pay down your credit card balance. Unless you can escape the 19 percent interest rates and the mountain of credit card debt you are under, it is virtually impossible to get ahead.

The average U.S. household has more than $9,100 in credit card debt. Organize your statements and start paying off those with the highest interest rates first.

Set a realistic goal that you can achieve. Resolve to pay off only one card in 2007. Paying down debt can be contagious. Eliminating one card will likely encourage you to start working on another.

This Year, Make Cash King

Choose paper instead of plastic in 2007 to make cash king. Although this may not be easy, there is no better way to stay on budget and avoid making purchases that you cannot afford.

All too often, we find ourselves walking around with no cash and putting the smallest things on our credit cards -- from a cup of coffee to a tube of toothpaste. Then we get a delayed dose of sticker shock when the credit card bill comes. This is how the cycle of debt starts, and most everyone can appreciate how difficult it is to get out of it.

Resolve to Get Wired

One of your financial resolutions should be to automate all of your finances. Replace your check book with a computer and mouse. Everything from paying bills to getting paid to investing should be done via the Internet. Automate your investments and bills. Sign up to have your credit card debited directly from your account, a surefire way to avoid costly late fees.

Automating your investments is the best way to save more, because it is easier to save and invest if you never actually touch and feel the money. Let the Internet eliminate your choice of spending or investing. Invest.

As a side note, for those who are worried about the integrity and safety of the Internet, according to Javelin Strategy & Research, online bill payers are 10 percent less likely to have their identities stolen versus those who use the standard brick-and-mortar payment route.

Got a Raise? Get an Emergency Fund

This year is getting off to a great start for most employees. According to a poll done by Harris Interactive and Careerbuilder.com, 81 percent of employers plan to increase salaries for existing workers and 65 percent plan to raise wages by 3 percent or more. If you are in this 81 percent, make a resolution to take your raise and put it directly toward an emergency fund.

Everyone should have between three months and six months' income saved in case of an emergency. Put this money in an account that you cannot access from an ATM such as a money market fund. Not only is it important to have money saved in case of a major financial crisis, such as an unexpected job loss, illness or accident, but it is also important to have a short-term emergency fund to handle minor financial emergencies, such as a car repair or new appliance.

For example, on average, it costs between $7,000 and $10,000 to replace a roof and $300 to repair a washer and dryer. As such, when thinking about your savings, you should think in terms of long-term and short-term needs.

Long Term:

You should have three months to six months of your current living expenses socked away in an emergency fund. To determine how much you will need, take into account all of your monthly payments and bills, including: mortgage or rent; car loans; gasoline; credit card bills; utilities; food; medical costs not covered by insurance and/or the cost of COBRA; and day care, etc.

Short Term:

Although most minor emergencies usually cost less than $1,000, you need to evaluate your personal situation to determine how much you should have on hand. For example, take into account your family situation, the age of your appliances and car, as well as other items in your household that might need repair or replacement.

Prioritize Retirement Savings

There are no scholarships for retirement. Early January is the time to talk to your human resources department about your employer sponsored retirement plan, such as a 401(k) plan, to make sure you understand how you are investing and to make changes. Make a change to your plan to take less take-home pay and more retirement security.

This year, you can contribute up to $15,500 to your 401(k), and if you are older than 50 years old, you can contribute an additional $5,000 in catchup contributions for a total of $20,500. If you are unable to max out, make sure you find out from your employer how much you have to contribute to qualify for your company's match.

Data shows that 20 percent of people who qualify for a company match do not invest enough to receive it. In essence, this is like saying "no" to someone offering you free money. Do not let this opportunity pass you up in 2007.