New Year’s resolutions are a way to outline the personal journey you will take in the coming year. Most people focus on vague goals about health, love, or life in general. However, a good resolution starts with strong questions and insightful introspection.
To that end, consider asking yourself the following questions before making your New Year’s resolutions.
Do liquid assets account for more than 10% of your total assets?
Liquid assets fall right in line with your savings goals. Investopedia defines a liquid asset as “An asset that can be converted into cash quickly and with minimal impact to the price received.”
Keeping a healthy number of liquid assets can help keep your money accessible should you experience hard financial times. You don’t want to hit a rough patch only to realize your net worth is tied up in your home or vehicle. Liquid assets usually include stocks, government bonds, and money market instruments.
If your liquid assets don’t sit at that 10% mark, consider spending some time this year building enough savings to cover 6-12 months’ worth of living expenses. Set up a reward checking account or a high-yield savings account.
How much money did you save last year?
Maybe it goes without saying, but each year you should attempt to save more money than you did the prior year. Barring any big-ticket purchases (for example: if you visited a car dealership recently), even a 1% increase in savings will add up over the course of your career. If you haven’t yet started a savings account, make 2015 the year of savings. You can even automate your savings by setting aside money before you have the opportunity to spend it.
Your company’s FSA or 401(k) are great examples of how simple saving can be when you don’t have to keep it top-of-mind. Beyond employer-backed savings plans, you can also set up automated transfers from your checking account to your investment or savings accounts every time you receive a paycheck.
How many times did you miss bill payments last year?
On-time payments serve as the largest factor in calculating your credit score. Each time you miss a payment or pay late, it negatively affects your credit score. In addition to credit consequences, missed payments mean unnecessary fees and charges.
If you noticed that you missed payments last year, use this year as a way to rectify that issue. Use automated payments for bills that can get deducted straight from your checking account each month. The less you have to think about finances, the more financially independent you’ll feel.
Does your total debt account for more than 40% of your income?
No? Great job! As you go through the year, resolve to keep your total debt service under that 40% mark. If you exceed it, you may find yourself overwhelmed by the debt and unable to make payments.
If your total debt (including principle and interest) exceeds 40% of your income, then you have a big resolution on your hands. Focus your energy this year on reducing your debt. Start by negotiating a reduced payment or switching to an alternative student loan repayment plan. After that, make paying off debt a priority so that you won’t face this same struggle again next year.
Do you have a credit card balance after your last payment?
Even if you make the minimum payment, retaining a balance on the card will cause you to build interest fees month after month. According to Bankrate, the average APR for fixed-rate cards hovers at 13.02%. This means you will face hefty interest fees by the end of the year if you neglect to pay the full balance.
As a good rule of thumb, always pay off the total balance at the end of each month. Use the brand-new year as a chance to pay off credit card balances from the past and to keep a zero-balance throughout the year. You’ll feel amazed by how much money you’ll save from avoiding those interest fees.
Answering these five questions and reviewing the state of your finances should leave you with plenty of New Year’s resolutions to choose from.