Money saving tips for 2008: New Year's Money Makeover

If there were a form for New Year's resolutions, "Get my financial life together" would be a standard on the resolutions checklist, right after "Lose Weight". Seems like everyone starts the New Year with the desire to whip their bank account into shape. Unfortunately, most people have given up by now.

I think that might be because the traditional advice: make a budget, skip the Starbucks, cut the luxuries, takes all the fun out of life. Budgets stink and who wants to cut out all the little luxuries that help you get through the work day or give you something to look forward to on weekends? Not me. I'm sure not you either.

So I've devised a simpler, easier plan to help you whip your finances into shape. You don't have to cut out the lattes or start brown-bagging your lunch. You will, however, have to spend a little time thinking about money, at least in the beginning.

What's the plan? Pay less for the things you already use. Then, get more bang for the bucks you already spend. These are two different things. I'll explain.

Pay less for the things you already use. Walk around your house with a note pad, and write down all of the brand name items you regularly use and buy. It can be shampoo, tampons, toilet paper, peanut butter-- anything that you usually buy brand name. Don't worry about the store brands or generics. Now, I want you to take that notebook with you the next few times you go shopping, and write down how much each of those items costs you at the various stores where you shop.

Here is the idea: Feel free to buy brand names, but don't you dare pay one more cent than you have to. I used to cruise through life just buying the stuff I needed without much thought. Then I did this exercise. Using one of my fav shampoos as an example here is what I found:

Garnier Fructis, 25 oz. shampoo cost $5.99 at Target, $7.29 at Walgreens, and $4.96 at Wal-Mart. Guess what. I now buy my shampoo only at Wal-Mart.

See, with a little bit of planning, you can free up a decent chunk of change-- for me, about $40 every month-- just by buying your favorite brands at the stores that sell them for the lowest cost.

Of course, don't go driving across town to buy one bottle of shampoo. Stock up or wait until you need something else from that store, to cut down on driving.

If you want to take it a step further, you can <gasp> use coupons. I'm not a coupon clipper by nature, but I sometimes use a coupon clipping service. They stockpile coupons and can send you stacks of them for the specific brands you buy. I buy an envelopes of coupons for odds and ends-- shampoo, tampons, cat food, Ziploc bags, etc.-- once every three months, then go stock up. It saves me a bunch of money and ensures that I don't have to run to a more expensive store just because I ran out of something at the last minute.

If you're on a tight budget, this will give you a little more wiggle room.

Now to part two.

Get more bang for the bucks you already spend. This step applies the basics of part one to all other aspects of your finances-- debt, bills and your bank accounts.

First, if you have debt, whether it's a mortgage, a car loan, a credit card balance, or a student loan, chances are you have a minimum monthly payment. I want you to look at how much you regularly send to your creditors every month. Now pay half that amount every two weeks instead of sending the entire payment once a month.

This should be really easy to set up if you use online banking. Just arrange to have half of your minimum debt payments paid each payday.

I'll tell you why it makes sense. Paying every two weeks helps you in two ways:

First, most companies charge interest on your debt daily. That means the credit card company is calculating the interest on the amount you owe them every single day and adding that to your total. If you make a payment every two weeks, it reduces the amount of interest you pay. Your first payment reduces the balance that's used to calculate your daily interest for the second half of the month. (By law, credit card companies must credit payments the day they are received.)

Second, when you pay every two weeks, you will unwittingly be making 13 payments a year instead of 12. (This shouldn't scrimp your budget because folks who get paid every week or two weeks get an "extra" third paycheck four months every year.)

Here is an example of how much difference this can make:

If you have a credit card with a $5,000 balance at 17% interest and you send in a minimum payment of $150 once a month, you'll pay $4,119 in interest and it will take 14 years to pay of the debt. (from CardRatings.com) But if you send in $75 every two weeks, you'll only pay $2,521 in interest and the card will be paid off in 3 years and 18 weeks.

All this without really increasing the amount you are used to paying. When just starting out, remember to check your accounts to make sure your payments are credited correctly.

All right. So you've got your debt payment plans figured out. This is even more important: Get free copies of your credit report. (There is only one place to get a truly free credit report : annualcreditreport.com.)

You're entitled to a free copy once a year. Why do you need it? Because everything-- from how much you pay for car insurance to how high your interest rate is on your credit card is based on your credit report. Improve your score, and you can lower your bills substantially.

When you get the report check for errors, and dispute any errors. Most reports have mistakes on them. They'll cost you.

Next, do you see any late payments? Charged off accounts? All of these are hurting your score. If you have a checkered past, make an effort to boost your score. It'll take about a year, but it will pay off significantly. Armed with a better credit score, you can demand better prices for auto, homeowners and renters insurance, lower credit card interest rates, lower mortgage and auto loan rates, etc.

Here is an example. On a 36-month car loan, if you have a good credit score of 720 or above, your interest rate will be 6.78 %. If you have an average score of 660 to 689, you'll pay 9.71 % for the same loan. If you have bad credit, at 619 or below, you'll pay in interest 14.1 % . On a $25,000 car, it can mean a payment difference of almost $100 a month.

How do you improve your score? FICO, the company that designed the score, is a little hazy on the details but some tactics are tried and true. Always pay your bills on time. Late payments wreck scores faster than anything else. Second, do your best to pay down the balances on those credit cards and auto loans. Having cards that are near-maxxed out will lower your score a lot. (For more info, go to MyFico.com)

Now the odds and ends...

Bust out your bank statements. Are they charging you fees? ATM fees? Account maintenance fees? Might be time to start shopping for another bank or for an account that's more in line with your banking habits. Banks rely heavily on fees to make money. Banks raked in about $24 billion in fees in 2005, and that number just keeps going up every year. Fees are nefarious. Do you really want to be the one padding your bank's quarterly earnings with your meager paycheck?

If you have a savings account, how much interest are you earning? If it's just sitting at the same bank where you have a checking account, the answer is not enough. Banks are paying on average a piddly half a percent on savings accounts. Half a percent. I once interviewed the CEO of a major Midwestern bank and he said banks can get away with charging so little because people are too lazy to move their money. Don't be lazy. Move it to a high-interest savings account. (Use my guide to online savings accounts.)

Now that wasn't so bad was it? You are well on your way to a brighter financial future, all without cutting so much as a single latte. Of course, if you do decide to cut out the latte....•