Planning for a Prosperous New Year: 4 Financial Resolutions to Reduce Debt

Sue Kerr-Cope, Mortgage Advisor/Loan Manager

December 20, 2023 — 9 min read

The numbers don’t lie—for most people, the new year presents a perfect opportunity to increase savings, pay off debt, and spend less money. In fact, the need for financial resolutions may be a higher priority for many families in the coming year, as credit card debt in the U.S. reached a record $1 trillion in 2023, according to the Federal Reserve Bank. Moreover, according to a recent survey, more than one-third of consumers believe they’re more in shape financially than last year.

With these compelling facts in mind, it's prudent for homeowners to chart out deliberate financial resolutions for the coming year. From debt consolidation and improvements to boost property value, to tips to build your credit score, there are several key areas to focus on in your financial resolutions for the new year.

Resolution 1: Manage & Consolidate Debt

With the new year comes a fresh start, but not for your debts, unfortunately. However, if you lay out all your debts, payments, and interest on current cards and loans and you notice some of the following rings true, that’s the first big first step toward understanding whether debt consolidation is right for you!

Debt consolidation may be a good idea if:

You’re juggling multiple high-interest debts. Consolidating them into a single, lower-interest loan can help you save money on interest payments and simplify your financial obligations.
Your credit score has improved. Your higher credit score can lead to more favorable loan terms, making debt consolidation a more financially viable option.
Your Debt-to-Income (DTI) ratio is manageable. Generally, if your total debt doesn't exceed 40% of your gross income, it indicates a manageable debt-to-income ratio. Your DTI ratio is a financial metric that compares your total monthly debt payments to your gross monthly income. In simpler terms, it measures how much of your income goes towards paying off debts.
You prefer a single monthly payment. Simplifying your finances by making just one monthly payment toward your debt can bring peace of mind. With debt consolidation, you can merge multiple payments into one, making it easier to keep track of your financial commitments and avoid missed payments.
You're committed to changing your spending habits to avoid taking on more debt. Being committed to changing your spending habits is a fundamental aspect of successfully managing your finances and, consequently, your debt. It signifies a shift in mindset and behavior, demonstrating a proactive approach towards financial responsibility.

Debt consolidation may be a bad idea if:

You can't secure a rate that makes sense. While you may qualify for a debt consolidation loan, there's no guarantee that the rate offered will be lower than your current rates; however, you may choose to proceed with a debt consolidation refinance if your main goal is to streamline payments.

You are already in the midst of a bankruptcy or debt management plan. If you're currently navigating a bankruptcy process or enrolled in a debt management plan, debt consolidation may not align with your existing financial strategies and legal obligations.

Your debt load is too large to manage with consolidation. If your total debt is overwhelmingly high, consolidating it into a single loan may not be practical In such cases, alternative debt relief options, such as credit counseling, debt settlement, or bankruptcy, may be more suitable.

You don't address the root cause of your debt. If your debt issues stem from overspending, lack of budgeting, or financial mismanagement, consolidating your debts without addressing these underlying issues may lead to a cycle of recurring debt. It's crucial to identify and tackle the root causes of your financial challenges to avoid falling back into the same routine.

Resolution 2: Identify Essential Expenses for the New Year

Fixed costs

Fixed costs refer to recurring payments necessary to avoid late fees, service disruptions, negative credit impacts, and potential debt. This includes things like rent or mortgage payments, utility bills, medical expenses, child care, and car insurance. Prioritizing these payments is crucial for maintaining a stable daily life.

To determine how much you need to set aside for these costs, compile a list of monthly, quarterly, and semi-annual fixed expenses; next, calculate the total amount needed to cover these expenses for each period. It may be a good idea to set up automatic payments for this account to ensure payments are consistently made on time.

Discretionary costs.

Discretionary costs encompass surplus funds remaining after covering your fixed expenses. These offer the flexibility to indulge in non-essential purchases, such as entertainment or shopping. How you choose to utilize these funds is at your discretion, so it’s important to exercise prudence.

To effectively manage discretionary costs, consider creating a separate budget category for these expenses and determine a reasonable monthly allocation based on your overall financial goals and obligations. Regularly reviewing your discretionary spending habits can also help you identify areas where adjustments can be made.

Other examples of discretionary costs may include:

Dining out at restaurants or ordering takeout
Travel and leisure activities, such as vacations or weekend getaways
Hobbies and recreational activities like sports, crafts, or music
Subscription services, such as streaming platforms, magazines, or memberships
Most electronics and gadgets
Most spa treatments or self-care services
Gifts and charitable donations

Emergency fund

If you haven’t already, it’s a good idea to set money aside in case you encounter an unexpected emergency, such as a medical expense or a vehicle repair, that you have not budgeted for in your discretionary or fixed cost accounts. For many people, maintaining two checking accounts along with an emergency fund represents a strategic approach to effective budgeting.

Having a designated checking account for fixed expenses ensures timely payment, minimizing the risk of late fees; simultaneously, a separate discretionary checking account aids in managing additional expenses within your budget.

Resolution 3: Identify Non-Essential Expenses for the New Year

Want to make sure your dollar stretches even further in the new year? Grab bank statements, credit card bills, and receipts from the past year and examine them meticulously; this detailed analysis will help you pinpoint patterns and trends in your discretionary spending. Look for expenses related to dining out, impulse purchases, subscription services, and other non-essential items. Consider categorizing these expenses to clearly visualize where your money is going.

Once you've identified these non-essential expenses, the next step is to evaluate their significance in your life. Reflect on each purchase and how it may or may not contribute to your overall well-being and happiness. If there’s a subscription you didn’t really use, or if you can cut back on dining out without impacting your quality of life, it may be prudent to do so.

Setting specific financial goals can provide additional motivation and direction. Here’s how to get started:

Determine how much money you want to save by cutting down on non-essential expenses;
Set aside the funds and put them toward more meaningful objectives, such as building an emergency fund, paying off debts, or investing in experiences that enrich your life;
Regularly monitor progress throughout the year to hold yourself accountable and make necessary adjustments to your spending habits.

Resolution 3: Improve Your Home to Boost Value

Owning a home is a big choice that can yield big returns over time as property value appreciates. The rate of this increase can depend on different factors, including the neighborhood, local demand for housing, and the economy as a whole; however, homeowners can also impact their home’s value over time by making upgrades and changes that boost appeal and selling price. Here are some options to help you choose which improvement will work best for you:

Upgrade to more energy-efficient features & appliances. Investing in energy-efficient upgrades can lower your utility bill and enhance your property's attractiveness to potential buyers when it's time to sell. Many buyers seek energy-efficient features to minimize their own expenses. If your home currently houses outdated, energy-draining appliances that make your interiors look dated, even a modest upgrade to modern appliances can significantly increase your selling price.

Invest in your kitchen & bathroom space. These areas are often considered focal points by potential buyers and can greatly influence their decision-making process.

In the kitchen, consider updating countertops, cabinets, and appliances; opt for modern, energy-efficient appliances to improve functionality and appeal to eco-conscious buyers. A fresh coat of paint, new hardware, or stylish backsplash can give the space a contemporary look without breaking the bank; additionally, upgrading lighting fixtures can make the kitchen feel more inviting.

In the bathroom, focus on fixtures, tiling, and storage solutions. Upgrading faucets, showerheads, and installing a sleek, modern toilet can instantly elevate the bathroom's aesthetic appeal. Consider replacing old tiles with newer, stylish options and invest in a well-designed vanity for added storage and visual appeal.

Use fresh paint to bring new life to your home. Does your home appear a bit worn, both inside and out? A do-it-yourself paint job may require minimal material costs, but its impact on your home's visual appeal can be substantial.

Whether you're refreshing your living room, bedrooms, or just giving your front door a makeover, a fresh coat of paint can turn aged surfaces into what appears brand-new, instantly elevating your home's charm.

LEARN MORE: Funding Options for Your Home Improvement Project

Resolution 4: Learn More about Home Finance and the Housing Market

When it comes to mortgage and real estate, knowledge is power. With close to 30 years of expertise, Eric Wiley, executive vice president and co-founder of PacRes, has navigated technological advancements, shifts in lending practices and programs, and transformations in national media consumption habits.

Now, he has committed himself to sharing his knowledge to ensure a secure and straightforward homebuying experience for all through his weekly video series, Wiley’s Weekly Wisdom. Click here to watch his latest video.

For more guidance and advice through every step of your home purchase or refinance journey, and beyond, reach out to your neighborhood Mortgage Advisor.

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