As the New Year approaches, we’re excited about new possibilities and the chance to make positive changes. Although your priorities for 2021 may look a little different than they did in past years, now is a great time to review where you want to be financially and to set the right goals to get you there. Here are some tips on setting financial goals for the year ahead.
Check Your Credit
Your credit history and credit score affect so many areas of your financial life. And, your credit report is one of the things lenders use to determine whether you qualify for credit (e.g., mortgages, car loans, credit cards, personal loans). Among other things, it shows your payment history—how well you handled credit in the past—as well as the status of current accounts. Even landlords and potential employers may take a look at your report before they make a decision, so you’ll want to make sure it’s accurate. Plus, checking it could help you spot possible signs of identity theft.
From now through April 2021, you can access your online report from the three major credit reporting agencies for no charge. After that, you’ll still be able to get a free report once a year. Your credit score, on the other hand, is a calculation made using a variety of factors, including what’s in your credit report. For those interested in information on credit scores, Navy Federal credit cardholders can see their FICO® Score anytime—absolutely free. You can read more about credit, credit scores (and how they’re calculated) and credit reports in our MakingCents Knowledge Center.
Build Up an Emergency Fund
Having an emergency fund can give you the peace of mind that you’re ready to meet unexpected challenges that could arise, like income changes, medical bills or car repairs. If you don’t have one already, start the New Year off right by opening an account where you can set aside some money.
Keep your emergency funds separate from the account you use to pay the bills or make purchases. Put the money in an account that earns dividends, like a savings account, certificate or money market account. The dividends you earn will help your fund grow a little faster, and you’ll be less tempted to spend the money.
How Much Do I Need?
A good rule of thumb is to work toward saving three to six months’ worth of living expenses. But, if you’re just getting started, you can begin with a smaller goal—like $1,000. You don’t need to save it all at once. You can break it into manageable amounts that you add regularly (e.g., weekly/monthly).
Are There Ways to Build a Fund Faster?
Looking for ways to build your fund even faster? Consider turning expenses into savings. What does that mean? One example might be if you’re working from home instead of commuting to an office, you could use the money you would’ve spent on gas or lunches out for savings. You could also get creative and find other ways to save, like canceling subscriptions you don’t use, asking for new quotes on auto or home insurance, or reducing TV or internet plans. Navy Federal members can set up automatic transfers from checking to savings accounts to earn even more dividends. You can choose how much you want to add and how often (weekly/monthly).
Pay Off Debt
Since most of us can’t afford to pay for a car or other large purchases with cash, we have a certain amount of debt. You can reduce the impact it has on your budget and your life by making a plan to pay off as much as you can, as soon as you can. You’ll find you’ll pay less interest and have more resources if you ever need to bounce back from a financial setback.
Two Simple Plans to Reduce Debt
Many of our members use one of two simple plans:
- Avalanche Method. The avalanche method focuses on paying off the accounts with the highest interest rates, because that saves the most money over time. You make sure to pay all your minimum payments, but on the account with the highest interest rate, you pay extra each month. Once that account is paid off, use its payment to add to the payment for the account with the next highest rate and so on.
- Snowball Method. The goal for the snowball method is to reduce the number of bills you have, so you’ll focus on the accounts you can pay off the soonest. Again, you’ll make all your minimum payments, but you’ll add extra to the account with the lowest balance. Once that’s paid off, you add its payment to the account with the next lowest balance and so on. You probably won’t save as much money in interest as you would with the avalanche method, but seeing one less bill each month is a great feeling!
Think Beyond the Short-Term
While it’s sensible to focus on your current financial situation, you also shouldn’t ignore the future. Long-term savings goals like your child’s education or even retirement are relatively time-sensitive. So, as you make decisions that will affect you this year, consider your long-term goals as well.
Many people reduced their retirement contributions during the early days of the pandemic out of concern that their income could change. However, there’s a solid reason to continue or restart them—you’ll want to stay on track for retirement so you’ll have the funds you need when the time comes.
Another thing you should do is to check how aggressively your funds are invested. Does it match your risk tolerance? Or, would you be more comfortable if you temporarily shifted your investments to lower-risk categories?
You don’t have to navigate your plan for the future by yourself. Our financial advisors are available to help you. You can make an appointment for a free phone meeting, where your advisor will take a comprehensive look at your finances and existing investments and make recommendations. Learn more about how a Navy Federal financial advisor can help you reach your goals.