For those who set financial goals in January, perhaps as part of a New Year’s resolution, the beginning of summer provides an ideal opportunity to re-access those targets, say financial experts.
“Mid-year is an excellent time to check-in and evaluate your efforts,” said Glen Buco West Financial Services in McLean, Va. “Have you been ‘paying yourself first’ to meet your short and long-term debt reduction or savings goals?”
One factor to consider is the process by which one makes decisions financial decisions. “There are two basic principles that make behavioral economics so powerful,” said Buco. “[First] the tendency to be overly optimistic about our own self-control, and [second] the endowment effect and loss aversion” he said. “With all good intentions, we may think that we have the ability to save for certain goals, but most people tend to spend all of their monthly income without allowing for additional savings.”
To combat these tendencies, it is important to set concrete goals and monitor your progress toward those goals. For those who might have difficulty adhering to a savings plan, Buco said, “it may be beneficial to establish automatic payments to savings accounts or use auto-enrollment and auto-escalation features to your retirement accounts, if available,” he said. “With the money saved, evaluate your investment goals. The stock market recently set a record high and interest rates remain very low. Has your allocation changed and do you remain diversified?”
“With all good intentions, we may think that we have the ability to save for certain goals, but most people tend to spend all of their monthly income without allowing for additional savings.”
— Glen Buco, West Financial Services
For those looking to decrease their debt with high interest rates and large monthly payments, this might be a time to reassess one’s financial landscape. “You must be aware of an illness before seeking a cure,” said Theresia Wansi, Ph.D., professor of finance, Marymount University in Arlington, Va. “Conduct a debt analysis to evaluate your financial health, make a summary of all debt and income sources. People are usually amazed at how much they’ve spent in relation to their income.”
“If a person is serious about paying off debt, they can’t spend all their money on other things and use what’s left over to pay off debt,” said Steve Pilloff, assistant professor of finance, George Mason University in Fairfax, Va. “They need to have paying off debt as part of the first line of set items in their list of critically important bills.”
Once a financial picture is clear, create a payment plan, listing all debts in order of decreasing interest rates and debt amounts, advised Wansi. “What do you payoff first?” she asked. “If you don’t have enough cash to pay your bills, you want to eliminate the lowest bill amounts first to free up money. … If you’re financially sound and you don’t have a liquidity problem, the wisest thing to do is pay off the debts with highest interest rates.”
Don’t be afraid to negotiate better repayment terms. “There is always room for improvement,” said Wansi. “Transfer credit card balances to cards with lower interest rates or negotiate directly with your creditors and ask for lower interest rates. If creditors realize you are really in a jam, they can eliminate the interest rate, even if they have to close the card.”
For those struggling with mortgage payments, Wansi recommends trying to refinance or making modifications to avoid defaulting on a home loan. “Take advantage of government programs designed to help you work with your lenders to give you better terms,” she said. One such program is the Home Affordable Refinance Program, better known as HARP.
“Another thing you can do is increase the frequency of your payments,” continued Wansi. “Lenders can offer a biweekly payment plan.”
Regardless of one’s financial situation, it is imperative to make more than minimum payments. “When you only make minimum payments you are a slave to your lender,” said Wansi.
Once you’ve hatched a debt repayment plan, take inventory of your spending and saving habits. “You have to try to save because every penny counts,” she said. “Unfortunately, we’re not in a saving society.”
“Consider it an expense like heating and food bills that [you] have to pay every single month,” said Pilloff.
Consider credit counseling “if your cash outflow exceeds your cash inflow or if you’re missing payments or are over your credit limits,” said Wansi. “Get a reputable company from [the Better Business Bureau] and be careful of companies offering to settle your debt. Bad companies will tell you to pay them, pocket the money and leave you in a worse financial state.”