- The Washington Times - Sunday, January 5, 2003

A new year means a clean slate, a fresh checkbook register ripe for the possibility that this year will bring more control of the cash flow.

Getting finances in order is often right up there in popularity with resolutions such as losing weight, getting in shape, stopping smoking and quitting gossiping. Like weight loss and fitness, the goals for each person are individual one person might resolve to cut up credit cards while another vows to start a college fund. Goals can be as large as doubling retirement savings or as small as installing financial-planning software, such as Quicken, to help balance the books.

Either way, financial resolutions sometimes grow as cold as home exercise equipment by February.

"Financial issues for many people are kind of like weight issues," says Barbara O'Neill, a certified financial planner and professor of family and consumer sciences at Rutgers University in New Jersey. "Resolutions acknowledge that people want to make a change. They know things can be better."

Getting finances in order can set the tone for harmony in other areas of life, says Ruth Hayden, author of several books on financial planning for couples and women.

"Money is one of the primary reasons couples argue," Ms. Hayden says. "That creates stress, so people want it resolved. They say, 'This time, this year, our lives will work better.'"

Ms. Hayden says families should sit down together to make money resolutions. Couples who agree or at least compromise on how money should be spent have a greater chance of sticking to their financial plan, she says.

"It may take saying, 'We have different perceptions on how money should be spent,'" she says. "If we have an extra $100, should it go for retirement, [toward] a new kitchen or for fun? If people can reach a compromise, they will be so much further ahead."

Resolving to pay attention to where the money goes is one of the first steps in getting a grip on finances, says Mary Malgoire, a fee-only financial planner with the Family Firm in Bethesda. Having the cash-flow items right there in print can help show where the money is going, whether it is hundreds of dollars in interest charges or $80 a month on gourmet coffee.

"I think a cash-flow-management program is absolutely essential to every walking, living, breathing American," Ms. Malgoire says. "It gives you a base line. It will help you see what it will cost you to live in retirement or whether your spending is going overboard."

I resolve to …

Ms. Malgoire says that some people don't start at the right place when making financial resolutions. As a result, "they run right smack into a brick wall right off the bat," she says. She advises starting small and being positive.

"There are so many negatives surrounding money," she says. "People say, 'I can't save,' or 'I can't stop spending.' It is important to look at the positives, such as 'I have a job and paycheck' and then think about what you can do."

The first step toward getting finances on track is understanding people's money personalities and the messages they have received about money, Ms. Malgoire says.

"Many of us grew up with bad messages from our parents, especially if they didn't handle money well," she says. "There are some great people and resources out there if you want to understand why you spend the way you do."

To get a grip on where the money is going, Ms. Malgoire recommends keeping a log or diary of expenditures and actions. Plugging the entries into money-management software is the best way to see where the money is going, she says.

For many people, the amount spent on credit cards and interest will be a large and shocking category.

"We live in an era of immediate gratification," says Dave Gardner, co-founder of the Motley Fool, the Alexandria-based financial Web site. "People buy what they think they need, even if they can't afford it. The average American now has $6,000 to $8,000 in credit-card debt. Credit cards make it too easy to make the wrong decisions, not to save, to spend and to be overwhelmed."

Mr. Gardner says that lining up the credit cards in your wallet is the start for tackling the issue.

"See how many you have and line them up by interest rate and not how much you owe," he says. "Then, if you have a lot of them, start by cutting up half of them."

Paying off the higher-rate cards first will make a dent in the total amount owed, Mr. Gardner says. Then call the remaining card companies and ask for a lower interest rate.

"Make the companies compete for your business," he says. "They don't want to lose you as a customer."

Ms. Hayden agrees that paying off or at least paying down credit-card debt should be among the top resolutions for many people.

"Debt can get you into a corner," she says. "These days, even employers are checking your credit before hiring you. My rule is, if you put routine expense items on a credit card, then you need to pay attention to your spending. If you don't have the money to pay the bills in full, you are in dangerous territory."

Thinking small can help people, even those with large balances, Ms. O'Neill says.

"Making small, realistic, positive resolutions, such as, 'I will pay twice the minimum,' are a start," she says.

Interest rates for mortgages and home-equity loans are at near-record lows, so people carrying credit-card balances would be wise to refinance their debt, Ms. O'Neill says.

"It is a perfect environment for refinancing right now," she says. "Interest rates are low and are expected to stay low. If you are going to refinance or get a home-equity loan for debt consolidation, though, you are going to have to have the willpower not to charge up again, or you will be right back in the same place."

Ms. O'Neill also advises refinancers to rethink the terms of a loan. For instance, if you have 17 years left on a 30-year loan, try to refinance to a 15-year loan. Otherwise, you might have a lower rate, but you will be paying on your debt longer.

Planning for 2003 and 2033

Financial resolutions are going to be different for people at different stages of life. A 23-year-old in his first job, for instance, has different goals than his 33-year-old brother or his parents nearing retirement.

For young singles getting their first "real" paychecks, the resolution should be to start saving, even if it is only in minuscule amounts, Ms. Hayden says.

"Just have a small amount taken from your account each month, and you can't touch it," she says. If you adjust your life to deal with the 5 percent or so missing from the account, you won't miss it, she adds.

Ms. O'Neill says young people should "save till it hurts."

"Sign up for your company's 401(k) and try to get the maximum match amount, which is 6 percent for many people," she says.

Mr. Gardner points out this example of compound interest to those who say they can't afford to save for retirement. If you put away $1,000 a year from age 20 to age 65, you will have about $1 million at retirement (assuming a return of about 11 percent annually). If you start saving more money over a shorter period of time, about $3,000 annually from ages 35 to 55, that will add up to just $192,600.

"So start early," Mr. Gardner says. "Put away small amounts and let it ride."

For people in their 30s, it is time to re-evaluate financial goals as they acquire houses and children, Ms. Hayden says. People in this category should resolve to talk about common goals and values and what needs to be done to get there. Does one spouse want to stay home to raise the children? Do both want to move to the country? Take vacations every year? Start a college fund? Now is the time to map out that plan, she says.

"I don't like to use the term 'fixed expenses,'" she says. "If you are going to make life work, you can change your job, your house, your car."

Another resolution for this age group is to safeguard against job losses or other financial disasters, Ms. O'Neill says.

"When you talk about an emergency fund, which should be three to six months of expenses in the bank, people's eyes glaze over," she says. "I can see they are thinking 'Get real,' but it is something to strive for."

Ms. O'Neill also advises people in their 30s and 40s to open a home-equity line of credit to cover those expenses in case of a layoff.

"You are not necessarily going to use it," she says, "but if you don't do it and then you need the money because you are unemployed, no one is going to give you a loan."

For people nearing retirement, paying for the golden years should take top priority, Ms. O'Neill says. That might mean there is less money to pay for college. It still will be OK, she says.

"The kids can get loans and scholarships," she says, "but you cannot finance retirement."

If baby boomers would like to pay for both, they should resolve to get the mortgage paid off sooner, Ms. O'Neill says. That can free up some money to pay for education.

Also, even though the stock market has taken a beating in the last couple of years, now is not the time to get out, Ms. Hayden adds.

"Resolve to leave the money there, but make sure it is diversified," she says. "The market is going to go back up. The perfect portfolio has a variety of stocks, bonds and cash."

Ms. Hayden says people in their 40s and 50s should take time this year to think about what they can do to supplement their income in coming years.

"Only about 2 percent of us will have enough money to live for the next 30 years," she says. "That has changed the whole issue of retirement. So people need to think about skills and education and third careers. It doesn't mean they will be working 40 or 60 hours a week, but they will probably need to work enough to protect their portfolio."

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