BALTIMORE — On the heels of holiday spending, many may be thinking about their financial resolutions for the new year.
WMAR-2 News Mallory Sofastaii sat down with Loyola University Maryland Accounting Professor JP Krahel for his tips on becoming financially fit starting with building an emergency fund.
1. Create a Financial Emergency Plan
"Financial success to me really means, it's not wealth, it's stability. It's the ability to know I can handle an emergency if it comes up," said Krahel.
But before stashing away funds in a savings account, think about what you already owe.
"If you've paid off your debts, and you have no savings, you're a lot better off than somebody with $7,000 in debt and $5,000 in savings," Krahel said. "I'd rather be at zero than at a negative."
From there work on saving what you can or consider lines of credit.
"The emergency fund may be the ability to borrow. If I have a line of credit available that I'm not using, well that doesn't cost me anything," said Krahel.
2. Build your credit score
And your credit score impacts how much you can borrow. Building that number should be another goal.
"Work toward extending your lines of credit, getting higher credit limits because that actually improves your credit," said Krahel.
3. College + Retirement
Next, think about the future.
"If you've got kids, set up a 529 plan so their college tuition will be atleast partially covered. Start putting more towards your retirement. There are some emergencies we can't plan for, but there are plenty of eventualities that we know are going to happen," Krahel said.
The IRS announced that employees participating in 401(k) plans will be able to contribute slightly more in 2020, raising the contribution limits to $19,500 from $19,000.
Krahel said it's a small boost that can mean big returns further down the road.
"Especially if you're younger. With compound interest that could be hundreds of thousands of dollars by the time you're retired. So I've got students who are graduating, they don't know how much they should contribute to their 401(k) and I say atleast contribute what your employer will match," said Krahel. "And it's tough to feel the pinch of that lost money but psychologically, honestly, it's taken away before you get your paycheck. So if you can budget for that slightly lower amount, it's almost as if the money's not even missed."
4. Re-work your budget
Every year you should also reassess your budget, and most importantly, drop any services you haven't been using.
"What's great is a lot of credit card companies will give you a nice little pie chart with where your spending is going. If I see that I'm subscribed to four different video streaming services and maybe I only use one twice a year, it's a cost-benefit analysis kind of thing," said Krahel.