Banks are as popular as gyms when it comes to New Year’s resolutions.
New Year’s resolutions typically focus on health issues, vowing to quit smoking or losing weight, but many are determined to improve their financial health in the new year by getting out of debt or at least managing it better. It’s no surprise, then, that banks are as popular as gyms in January.
If you’re resolute to dig out from under all your debt, here are three steps to help get you started on the right financial foot in 2015.
Step 1: Do you really know how much you owe? Many people don’t really know how much debt they have. Make a list of all your credit cards and outstanding loans, what your balances are and how much interest you’re being charged every month. The numbers might be scary, but it’s difficult to solve a problem until you’ve identified it.
Step 2: Next, calculate your disposable income. This can be done by subtracting all of your recurring monthly expenses from your total monthly household income. The list of monthly expenses may include the mortgage or rent you pay, car payments, insurance, utilities, as well as estimates for food and other living expenses. The money that is left is your “disposable income,” and is what is available to pay off debt.
Step 3: Maximize the value of your debt payments. Credit card and loan statements will list the interest rate or finance charge you are paying on outstanding balances. Sometimes these variable rates can be higher than you realize. Those bills with the highest rates need to be paid off first — or find a lower interest alternative and consolidate these bills into one loan. Paying one bill instead of a whole stack is not only easier, but you’ll likely save money every month on the interest rates while you’re doing it.
“With a lower interest rate on your outstanding debt, you can put more money toward paying down the principal rather than paying for higher interest rates,” said Derek Wong, Vice President of Credit Products at First Hawaiian Bank. “This will both help you pay down your loan faster and accumulate less interest on your balances, saving you money over the length of the loan.”
Often, you’ll find the lowest interest rates with home equity loans.
“Because your home is used as collateral, banks assume less risk with home equity loans,” said Wong. “These savings get passed on to consumers through lower interest rates.”
As with any New Year’s resolution, managing your debt will take dedication — you have to stick with it. You didn’t accrue your debt overnight, so it will take time to pay it off. But with a good plan, you can start to see results right away.
“It’s a good idea to review your finances every year,” said Wong. “Make a list of your income, expenses and bank accounts (savings, loans, credit cards, 401(k) and compare it over time — year-to-year. Sometimes the first step is just to document what you have in one place. You can even bring in your year-end statements to discuss with your banker. At First Hawaiian Bank, for example, we have personal bankers who would be happy to review, discuss and bring in additional experts to make recommendations.”
Once you have all the income and expenses in front of you, you can develop a financially smart plan to pay off debt and save money. When you talk with the experts, they’ll work with you to find ways to save more.
“Sometimes, paying down your equity line balances faster may make sense, meaning making a payment with each pay check, rather than saving it all for the end of the month when it’s due. Scheduling your payments online, such as through FHB Online®, can make it easier and more convenient to manage your debt,” said Wong. “By paying more frequently, borrowers can save on interest that is being compounded daily.”
“The two levers a borrower should consider are the speed of repayment and the interest rate,” Wong added.
Achieving your 2015 financial goals may be easier than you think. Talk with a personal banker at First Hawaiian Bank for a more personalized approach and find the strategies that meet your specific needs.