Increase savings. Pay off credit cards. Build an emergency fund.
When Bank of America surveyed more than 2,000 people about their financial New Year’s resolutions for 2023, these three goals topped the list. And it’s no wonder. With inflation and holiday shopping top of mind when the survey was conducted in October 2022, consumers may have focused on these goals to position themselves for greater financial security in 2023 and beyond.
If your financial New Year’s resolutions also involve savings and debt reduction, understanding the financial habits you’ll need to master to accomplish these goals may get you started on the right track.
How to Increase Your Savings
Whether your goal is to build an emergency fund, buy a home or a car, or save for your child’s education or your retirement, the basic steps to boost your savings are the same.
The first step is to figure out how much you want to save, how much you can add to your savings each month, and how fast you want to reach your savings goal. Knowing why you want to increase your savings may help you set a target for how much you want to save.
The next step is to establish measurable goals that feel achievable to you. Setting goals that aren’t too easy or too hard should help you stay on track and achieve what you set out to do. Enlist family members and friends to cheer on your efforts and progress.
A good financial habit is to pay yourself first. When you receive your paycheck or other income, deduct a portion toward your savings before you allocate funds for other purposes. You can also use your tax refund, year-end bonus, financial gift, or other windfall that you receive to supplement your savings before you spend.
A savings account at a bank or credit union can help you keep your savings secure and track your progress toward your goal.
Boost Your Savings With Cash Back Rewards
Cash back rewards cards can be an excellent source of additional funds to boost your savings. Some offer a flat rate, such as unlimited 1% cash back, for all of your purchases with that card. Others boost the reward to 2%, 3%, or even 5% for different categories of spending, such as groceries, gas, dining out, or travel.
|2% Cash Back||3% Cash Back||5% Cash Back|
Cash back cards are easy to apply for and use. The application process is no different from other types of cards, and most cash back cards can be used wherever other types of cards are accepted.
You may need good or excellent credit to be approved for some premium cash back cards, but there are also plenty of good cash back cards that may approve you with fair credit. There are cash back cards especially for students, too.
You must pay your balance in full each month for this strategy to work. Otherwise, interest charges will negate the value of any rewards you earn. And be sure to subtract the annual fee from your potential earnings if the card charges one.
Another way to boost your savings is to apply for cards that offer a cash signup bonus. The best card signup bonuses can amount to hundreds of dollars. You may have to pay an annual fee or meet certain minimum spending requirements during the first few months that your account is open to claim a card signup bonus.
How to Pay Off Your Card Debt
Paying off card debt is more than just a popular New Year’s resolution. It’s also a major year-round goal for many consumers.
While this goal can seem challenging, several tried-and-true methods should work well. The two most popular methods are called the snowball and the avalanche.
Both methods start with reviewing your monthly expenditures to figure out how much you can allocate toward debt repayment each month. The more money you can use for this purpose, the faster you’ll achieve your goal.
The next step is to make a list of all your debts, including how much you owe on each card and the annualized percentage rate (APR) you’re paying. The APRs should be printed on your card statements. If you use retail store cards or Buy Now Pay Later plans to make purchases, you may want to include those payments on your list as well.
Creating this list may be the hardest part of paying off card debt because you’ll be forced to sit down and really figure out exactly how much you owe and how much you’re paying in interest charges. The upside is that with a complete list, you can plan your debt reduction, set goals, measure your progress, and celebrate your success.
Debt Reduction: Snowball or Avalanche?
Once you have your list ready, reorder your cards in two ways:
1. The smallest debt to the largest.
2. The highest APR to the lowest.
The snowball method prioritizes paying off your smallest debt first, then your second smallest, and so on. This method gives you a quick win to motivate you to continue paying off your card debt.
The avalanche method prioritizes paying off your highest APR first, then your second highest APR, and so on. This approach may take longer to produce a win, but it can save you money and enable you to pay off debt faster.
If you still can’t decide which card to pay off first, consider alternating between the snowball method and the avalanche method.
While you’re paying off your card debt, be sure to make at least the minimum payment on every card you have every month. Skipping payments or making late payments can trigger penalty fees and higher APRs, which can make paying off your card debt harder.
Keep in mind that making the minimum payment on your credit cards may not be enough to pay off the interest you owe each month. Unpaid interest is added to your balance, so if you can pay more than the minimum due, pay it. You’ll be glad you did when you get your next statement.
Balance Transfers Can Help You Pay Off Debt
Shopping around for a balance transfer card that makes sense for your situation can help if you’re disciplined. This type of card lets you move debt you already owe to a new card, typically one that charges a lower interest rate.
Many cards of this type charge you 0% interest on a transferred balance for a period up to a year or longer. You may also have to pay a balance transfer fee of 2% to 5%.
If you’re struggling to make your minimum payments and also pay off your card debt, you may need to get a second job, start a side hustle, sell some of your assets or belongings, or look for ways to earn more income.
A new cash back rewards card, new card signup bonus, or refer-a-friend bonus for prepaid cards may bring in some additional cash as well.
Financial Habits Set You Up for Success
As with other goals, financial New Year’s resolutions require some effort — and willpower — to achieve. Good financial habits can help.
If you experience setbacks, try not to become discouraged. Review your intentions, make any adjustments you need to move forward, and then try again. And remember, resolutions don’t have to be made in January. You can update yours and make new ones any time throughout the year.
When you accomplish a goal, celebrate your success and then set some new goals for the next new year and beyond. A consistent habit of making and keeping New Year’s resolutions can set you up for a lifetime of financial success.