By: James Philpot
Last week, I discussed doing financial spring cleaning with the goal of organizing and de-cluttering. This week, we continue our financial spring cleaning by focusing on steps you can take now that may simplify your life and improve your cash flows, either immediately or in the long term.
Pay off Christmas bills. If you are still making payments on those purchases — from jewelry, electronics, clothing and/or sporting goods stores — now is the time to stop. Even at a relatively modest credit card interest rate of 10%, a $500 purchase will take about 36 monthly minimum payments to pay off. Meanwhile, you will have spent about $130 on interest above the purchase price. Considering that interest rates on savings are still very low, paying down higher-interest consumer debt makes sense, even if the payment funds came from savings.
Create a cushion. If your Christmas bills are paid, review your emergency fund. Most financial planners recommend households maintain an amount equal to between three and six months of household expenses in a very liquid account — like a savings or money market account — that is separate from your main transactions account. These funds can be used to fund occasional large and unexpected expenses, thus “smoothing” overall cash flows. In the event of a disaster (read: job loss or large medical bills), this fund can ensure a temporary maintenance of living standards. You can then replenish the account gradually or quickly when the disaster has passed.
Consider a re-fi. If you have an older existing mortgage loan on your home and you have not yet refinanced, now may be the time to do so. Current mortgage loan interest rates are at historically low levels, hovering at or below the 4 percent mark (depending on the loan maturity). The Federal Reserve has lately signaled that higher interest rates could be on the horizon. Re-fi decisions generally make the most sense when there is a large difference between the rate on your existing loan and current loan rates, and you have a long time (10 years plus) until loan maturity.
Review fixed expenses. Have you been going to the gym that you joined in January? Your new year’s intentions were good, but if you have not made progress toward your fitness goal by now, odds are you aren’t going to. While you are canceling your unused gym membership, you might also review how often you enjoy using other fixed monthly expense items like club memberships, subscriptions (print and electronic), etc.
Dr. James Philpot is a certified financial planner and is associate professor of finance at Missouri State University. Statements in this column are intended for educational and informational use only and are not to be construed as investment advice.