By FPA Member Christine Parker, CFP®
Last Updated: December 13, 2010
Want greater financial security and independence? Then follow these three New Year’s resolution tips to learn how to improve your bottom-line and increase your net worth. One of the keys to achieving New Year’s resolutions is to put your goals in writing and create an action plan that will help you monitor your progress and stay on track throughout the year.
Here are the top three New Year’s resolutions to help you improve your bottom-line and increase your net worth for greater financial security and independence:
Resolution 1 — Increase My Net Worth
First, you’ll need to know where you stand right now. Prepare a Year-end Statement of Financial Position also called a Net Worth Statement. To calculate your net worth, simply subtract the total value of all of your liabilities (debt) from the total value of all of your assets, as of a certain date, usually Dec. 31.
|Year-end Statement of Financial Position, as of Dec. 31, 20__|
|Net Worth (assets minus liabilities)||$185,000|
Liabilities include all current debt balances (pay-off amount) for your home mortgage, second mortgage, auto loans, education loans, personal loans, credit cards and any other debt.
Assets include the current fair market value of cash and cash equivalents, savings, investments, retirement savings, home, second home, personal property, autos, collectibles and other assets.
Based on your current net worth, set a goal for where you want to be at the end of next year. Are you aiming for a four, six, or 10 percent increase? How does your net worth compare with the median net worth of American families in your age group?
|Median Net Worth of American Families|
|Age of head of household||Median net worth|
|35 to 44 years old||$11,800|
|45 to 54 years old||$86,600|
|55 to 64 years old||$182,500|
|65 to 74 years old||$253,700|
|75 years old and over||$213,500|
What can you do to increase your net worth year-over-year? Add more to your top-line by increasing assets or add more to your bottom-line by decreasing debt, living within your means and lowering credit card balances will help tremendously.
Resolution 2 — Save More of My Income
Saving more of your income can help increase your assets and improve your bottom line. Set an annual savings goal from total income. Calculate your savings ratio to help determine if you are on track and saving enough. To calculate your savings ratio, simply divide your total annual personal savings and employer contribution by annual gross income. (Total annual personal savings + employer contributions / gross income = savings ratio.)
Your saving ratio should be in the range of 10 to 30 percent, depending on your financial goals and objectives. Most likely your savings and investments will be used at a later date for one or more financial and life planning goals, including saving for emergency, new or used vehicle, first or second home, home improvements, starting a family, college education, retirement or other major milestone. If you savings rate is less than 10 percent, consider increasing your savings this coming year.
Resolution 3 — Raise My Credit Score
Monitoring your credit history, fixing errors in your credit report and learning how to better manage debt can help you improve your credit score and the bottom-line. To get started, you will need to find out what your credit score is now and set a goal for where you want to be by the end of next year. Women are less likely to know their credit score, according to a Harris Interactive™ survey, conducted in May 2010. Credit scores range from 300 to 850 and can fluctuate up or down. For example, the lowest interest rates listed on the FICO Home Purchase Center rate chart are for credit scores of 780 or above.
|Credit Score Range|
A high credit score is very important now because of tighter lending standards. Not all debt is bad debt, improving your credit score will help you qualify for the most favorable credit terms and rates. Because less of your income will be going toward interest payments with a higher credit score, you may be able to put the extra cash into savings or pay off a loan balance faster, either way you’ll be improving your bottom-line. You’ll have to run the numbers to determine which approach is best for you.
Your credit score and credit history can be used to determine mortgage rates, credit card terms, auto insurance rates, and car loans. Even employment opportunities and security clearances can be contingent upon credit scores. Of all types of debt, credit cards often carry the highest interest rates up to 30 percent for some.
Access your FREE annual credit report to identify and correct any errors. Visit the Federal Reserve Board's new online Consumer's Guide to Credit Reports and Credit Scores. It’s important that you know where to go to get your free annual credit report with no strings attached. For more information about where to go, visit the consumer guide available at: The Federal Trade Commission's Information on Free Annual Credit Report.
Remember your credit score (FICO score) is not provided with the free annual credit report. Most likely, you’ll need to purchase your credit score from one of the three credit reporting agencies. Credit scores can vary from one reporting agency to another. Therefore, you may want to purchase your credit score from all three — Equifax, Experian and TransUnion — for around $8 each. Additionally, if you apply for a loan, get into the habit of asking for your credit score from the lender, too.
FPA member Christine Parker, CFP®, is president of Parker Financial, LLC; a leading provider of personalized financial planning and investment advisory services, specializing in helping women executives and entrepreneurs plan well to live well at every major milestone! Christine is named among Washingtonian magazine’s 2010 Top Financial Planners. The information contained herein should not be viewed as Parker Financial, LLC providing investment, tax or legal advice. Before implementing any strategy, please consult your accountant, legal counsel and financial planner.