5 New Year's Reality Checks for Your Health and Wealth

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For many people, a new year represents an opportunity to dedicate time and energy to getting physically fit. For others, the prime focus of their self-improvement efforts will be their finances. And Ellie Kay and Danna Demetre, co-authors of "Lean Body, Fat Wallet," say the principles and habits that can help you lose weight and gain a healthier body are the same as the ones that could lead you to financial security.

Here are five reality checks to help you identify your financial problem areas and tackle them head-on in 2014.

1. Try on your fiscal "bathing suit," and shine a bright light on your full credit picture. Demetre says a great reality check before you indulge in a high-calorie treat is to try on your bathing suit and decide if you're where you want to be with your weight. If not, she says, keep that image of yourself in the mirror in mind when you're about to go out to eat.

Similarly, getting an accurate picture of your credit history is the first step in keeping your borrowing and spending in check. Checking your credit report will give you a true-to-life picture of where you're at right now. Kay recommends getting credit reports from all three bureaus (Experian, TransUnion, and Equifax) at annualcreditreport.com to see all of your debt in one place.

2. Step on the "scale," and see how much you're paying in interest. Your scale gives you an instant answer about how much you weigh, and how far you are from what you see as your ideal weight. Yet most of us are in the dark about how much our debts really weigh. "This is usually the single biggest shocker that gets consumers to change their spending habits," says Mike Warren, a personal finance expert and author of "Guerrilla Credit."

Warren offers step-by-step directions on how to weigh your debt burdens: "When you get your 1098s from your mortgage lender and student loan companies, add those [the interest portion of your payment] together. Now add in interest paid on such things as car loans, installment loans, and credit cards. If you happen to have taken out a payday loan, pawnshop loan, or even title loans, then add that as part of it as well. Once you have the total, divide that number by 365. That is how much you are paying every single day in interest alone to some bank or other institution that could be going into your savings or investment accounts."

3. Target "fat," not "muscle," by calculating your debt-to-income ratio. Not all extra pounds are equal. The goal of proper diet and exercise is to lose fat, not muscle. The same goes for trimming down debt -- some debt is bad (the flab) and some is structurally necessary and beneficial (the muscle).

"Some debt, like mortgage debt, can be deductible for tax purposes ... and student loan debt can help you build greater wealth over time," says Warren. Bad debt doesn't have any beneficial characteristics. "I'm talking about credit cards, store/merchant cards, title loan companies, pawnshop loans, and even payday loans."

Add up all of your bad debt and divide that number by your total income. Warren says that a debt-to-income ratio of 6 percent or less that you are actively paying down is a sign that you're on the right track. "If it's any higher, you need to get serious about knocking out this debt," he says.

It's important to come up with a formal play for debt payoff. "Use a credit card payoff calculator so you can see how long it will take to pay off your credit card debt if you only make the minimum payment," Kay says. (Check out this debt payoff calculator at Bankrate.com.) "Then start tackling those debts one at a time. As soon as you've paid off one, you can double up your payments on the next."

4. Count calories and pennies. "I'm against strict diets, but people need a reality check on what they're really consuming," says Demetre. "Just keep track for a week or two and use a device like a Fitbit to monitor your activity level. People have no idea that you can gain 20 pounds in one year if you consistently consume 200 extra calories a day."

Just as you need to count calories and monitor your activities to see what you have coming in and going out, you need to track your income and expenses, says Kay.

Warren recommends tracking your spending to the penny for 30 days. "You'll be amazed at how easily the money slips through your fingers," he says. "So create a budget and figure out what you can spend money on and what you can't. Then stick with it."

5. Check on your long-term financial health. Any exercise you do now has long-term benefits for your future health. The same goes for retirement savings. For employees with a 401(k), Rob Jupille, president of RTJ Financial Management, recommends that you check your first pay stub in December to ensure you've maximized your contribution. That way you can make any adjustments for the next pay period so that you start the year setting aside the correct amount.

When it comes to exercise, an expensive gym membership doesn't get you a better workout than you could get at your local Y. Same goes with investments. High fees are not the mark of high quality, which is why it's important to review your investment costs and see if there are cheaper alternatives.

"If you hold mutual funds, specifically ask your broker what the expense ratios are for each of your holdings," says Guy Penn, principal and founder of G. M. Penn Wealth Management. Review your investment costs. "Find out exactly what you are paying in commissions. Always keep asking, 'Can we get the same results at a lower cost?' Eliminate any hidden expenses that can erode your investment gains over time."

The Best Plan Is One That You'll Follow

Whether you're watching your weight or your bottom line, Demetre and Kay say you have to develop a sustainable, realistic plan. "You have to ask yourself if your plan is something you can stick with on most days for the rest of your life," says Demetre.

Fight against the "all or nothing" concept, she says, and take small steps beginning right now rather than going on a crash diet or savings binge. "It can't be something you stop after 10 days. It takes 21 days for a habit to become ingrained, so it's important to be realistic about your eating and exercise from the beginning."

Kay says the same advice applies when you establish your budget. "You can't base your budget on never eating out because you'll set yourself up for failure," says Kay. "But maybe you can cut it back to once a week or twice a month or choose less costly meals."

Kay and Demetre recommend having an accountability buddy, someone you can share your goals with who will help you stick to your plan. If you need to eat less or spend less, it always helps to share your frustration -- and your triumphant moments.

Michele Lerner is a Motley Fool contributing writer.

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January 02 2014 at 11:49 AM Report abuse rate up rate down Reply


January 02 2014 at 11:48 AM Report abuse rate up rate down Reply

And don't forget to leave a lot of leeway for health insurance. No one knows how high it will go.

January 01 2014 at 8:36 PM Report abuse +2 rate up rate down Reply

With stagnant wage growth workers are tapped out. Many companies do not have 401K's with matching and unless you are a single worker, setting aside 5% for your 401K is difficult. The easiest way to stay above water is to quit using charge cards, that could be worth an 18% return because if you don't use them you won't be paying the expensive interest that comes with them. Pay cash when at all possible. Don't overextend on car purchases, buy LESS house and car than you can afford and make one extra payment during the year on your mortgage. Living within your means is PAINFUL, I've done it my whole life, but it is the only way to stay out of debt.

January 01 2014 at 10:22 AM Report abuse +4 rate up rate down Reply
1 reply to komivesdd's comment

I think your comment is very realistic and good advise.

January 01 2014 at 4:52 PM Report abuse rate up rate down Reply

the author should be commended on this witty, simple, yet very informative article. it is excellent and better than most. the secret to financial independence is living within means, no debt, and saving even if a little over long term. ignore all the jibberish and expert advise from others that want to take a piece of your money under the premise of simplifying finances, its too difficult of an idea to manage without paying somebody else to help, chasing return, and risk your money not their own (what a great deal). financial well being is a marathon with many little steps, long and tiresome, but very rewarding-not a sprint - quick, jerky, fast, and over in a flash- lets hope young couples, or those just starting out, or those trying to get back on their feet read and follow the program. it is really the only full proof program to financial independence for most folks-happy new year

January 01 2014 at 9:56 AM Report abuse rate up rate down Reply

Why do these financial writers ALWAYS have to try to complicate simple subjects????

There is nothing mysterious about being responsible with money.

If you are fortunate enough to still have a decent-paying job, make it a top priority to PAY OFF ALL DEBT THAT YOU HAVE. Then, don't acquire any more debt. Live below your income. Focus on saving as much as you can. Study and learn how to invest those savings. The new reality is that you can count on being fired from your job at the magic number of 50 years old. By the time you turn 50, you had better have one heckuva financial safety net in place. You will be 16 years (at least) away from even being able to apply for Social Security. Trying to work your way through a big snarl of red tape to apply for unemployment isn't easy, either.

The internet is full of sad stories from unemployed people who were hit with an unexpected job lay-off notice that they never saw coming (although they probably should have realized that "job security" is a thing of the past.). Then, they get their cars reposessed because they can't make the monthly payments any more. Their homes get foreclosed because they bought a big house based on having income from two wage earners. And the slide downhill just picks up speed from that point onward.

It is heartbreaking to read stories about hard times from people who have lost their jobs and been job hunting and unemployed for years. But, the harsh truth is that a lot of them created their own problems. If someone is not earning $500,000 (minimum) per year, that person simply CANNOT AFFORD to buy a new car OR a new house at current bubbled-up prices. (How in the world did we ever become dumb enough to actually think that a house priced at $300,000 is a "great deal"??? It's not.)

Throw in the expenses of having 2-5 kids, plus a couple of household pets, on top of everything else ---- and unemployed people have virtually no chance of making it thru an extended jobless time period.

If you are not fortunate enough to have a relative, or close friend, who is generous enough to let your family move in with them, you will probably end up on the street. More tent cities seem to sprout up every week. Don't think this can never happen to you, because it can happen to any one of us. The phony government unemployment figure is a sick joke. The real number is probably close to 25%. Hard times have come around, again. We are in a grim Depression.

January 01 2014 at 9:42 AM Report abuse +3 rate up rate down Reply

Wait till you see the STICKER SHOCK,,,,
wait till you see THE TONS OF PEOPLE THAT WILL CHANGE the way the voted this year.!!!!
It will not be good for one party,,,need I say .!!!!

January 01 2014 at 8:56 AM Report abuse -7 rate up rate down Reply