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New Year's Resolution: Reduce debt and save more

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Michelle Blog PhotoDid you make a New Year’s resolution to get your finances in order? If so, you are not alone. Getting out of debt and saving more money tops the list of most common resolutions made by Americans each year. Big tasks? You bet. But not impossible. The key to reducing debt and saving is spending less.

The first thing you need to do is find out where your money is going. Start by listing your expenses and categorizing them as either a necessary or a discretionary expense. Necessary expenses are things like rent or mortgage, car payment, gas and electric, and groceries. Discretionary spending includes dining out, a specialty coffee drink, or spa service.

To get a good handle on your spending, you may need to track your expenses for several months. Using a budget worksheet or an online service like mint.com may be helpful.

Once you understand where your money is going, it will be easy to start making changes. Redirect money you save by eliminating discretionary expenses to pay down debt. After your debt is under control, funnel that amount into savings. Build an emergency savings fund for unexpected expenses such as a new furnace or car repairs and open an IRA or a 403(b) to prepare for a comfortable retirement.

To make a big impact on your household budget, look at your biggest expenses: typically housing and transportation. Financial professionals suggest that housing costs (including taxes and insurance) should not exceed 35% of your pretax income—with some saying no more than 25%. If your housing costs are out of whack, it may be time to consider a move. Driving a more economical car or eliminating the extra vehicle can also save you substantial amounts.

Michelle Slawny, CFP®