Some Financial New Year's Resolutions

by Anya Kamenetz of Generation Debt

It's 2008 - and time to make a fresh financial start.

Simply ringing in the new year at midnight just doesn't do it for me anymore. I have a six-year tradition of greeting the dawn on New Year's Day. There's nothing like a cold, clear January sunrise to make you really believe in new beginnings.

Not that new beginnings are in short supply during the Gen Debt stage of life. Most of the young adults I know already have lives that are jam-packed with transitions: graduating college, starting grad school, changing roommates, changing jobs, changing cities, changing relationships. Even relatively small shifts like taking out a loan, getting a promotion at work, or dealing with the holidays can add stress to our lives. Check out this scale to see just how many "Life Change Units" you've piled up in the last year.

No matter what changes you might be experiencing, the new year is an excellent time to take stock of your personal, professional, and financial lives. According to a Harris Survey commissioned by Yahoo!, 65 percent of Americans who make a financial New Year's resolution vow to eliminate or reduce debt. Here are some of my own monetary resolutions for the year.

Spend lean and green

With the Bali climate conference taking place in December, a big energy bill in the Senate, and Al Gore accepting the Nobel Peace Prize for his efforts to help solve the climate crisis, awareness of our impact on the environment is at an all-time high. Recently, I had an inspiring conversation with TLC's Peter Walsh (the host of that cable network's "Clean Sweep") in which he pointed out that every purchase we make includes "buying in" to the manufacturing, transportation, and packaging of the product.

The earth's future belongs to young people like us, and that's why I'm trying hard to buy less, buy used, buy local, and buy green. This doesn't always mean purchasing the cheapest thing in the store - certainly not if it's going to wear out and need to be replaced right away. It means making conscious spending decisions, choosing items that are beautiful enough to give you joy and well-made enough to last a lifetime.

For more motivation, watch this very informative animated Web lecture, "The Story of Stuff."

Monitor your credit score

I had a ding on my credit score early last year due to a missed bill while I was out of the country, so I've been ordering my credit scores from MyFico.com for $15.95 a pop every six months.

This is an excellent place to start getting a handle on your financial life. (You can also go to Annualcreditreport.com to get your free credit report as required by federal law, but it doesn't include your score.) The credit report shows all the revolving accounts you have, such as credit cards, student loans, and car loans. It shows your payment history and the number of credit inquiries made in the last year -- for example, if you signed up for a new cell phone account or applied for a car loan, a company may have pulled your file.

If you see any mistakes on your account, you'll need to send a letter disputing the charge. MyFico does a good job of explaining which actions (like paying off your cards) can help your score and which actions (like maxing out your cards) can hurt it. But don't sign up for the extras like credit-score monitoring services (which alert you monthly, weekly, or even daily to changes in your credit) -- they're of dubious value.

Rediscover pencils, paper, and cash

Financial management is increasingly taking place online. This fall I've been trying out some of the different free online financial planning services aimed at younger folks, such as Mint, Geezeo, and Wesabe.

These sites centralize all of your accounts in one place, which makes things easier for you if you have multiple credit cards or student loans. For me, what works best is to have one bank account, one credit card that I use, and one brokerage account. Each of these institutions sends me a monthly e-statement, reminding me to go over the books.

As useful as online tools can be, 2008 is going to be the year of the analog for me. Just last week I was trying to figure out a discrepancy in my credit card bill, and I ended up writing down and adding up all the charges for the last three months. I was shocked to realize that on the credit card I "never use," I had made over $250 worth of purchases. There's nothing like pen and paper to make money clear and concrete.

I also vow that January 2008 is going to be the month I try out the envelope trick. If you want to get a clue about how much you're spending on incidentals, go to the ATM at the beginning of the week and distribute the cash into envelopes marked Food, Travel, Entertainment, Pharmacy, and Miscellaneous. When you go to a store, take out the cash from the right envelope and put in the receipt. No more cash? No more movies or pizza slices until next week.

Get proactive about saving

Pay yourself first. Your first priority is paying down high-interest debt. Then you want a $2,000 emergency fund (invested in a money market or e-savings account earning 4 percent-plus) and a retirement account. If you're a savings pro, purchase a 12-month CD (topping out at 5 percent interest) as a way to save for medium-term purchases like a vacation or a car. If you devote 10 percent of your income to savings, you'll be a happy camper.

Take control of retirement planning

If you're in your 20s and you don't have a 401(k) through your employer, do not pass go. Open a Roth Individual Retirement Account right now. There is no minimum amount to open the account.

Once you open it, there is the question of how to invest the funds. This can be surprisingly simple. I originally opened my IRA with my bank in 2004. I had asked for my retirement savings to be invested in "low-cost" mutual funds and trusted the friendly, helpful representative at the bank to provide them.

This year, in an attempt to diversify, I also purchased some overseas mutual funds with Vanguard, the market leader in low-cost investing. In the process, I learned that I should be looking to invest in "no load" mutual funds with an "expense ratio" of 0.75 percent or less.

It turns out that for an average, long-term investor, low administrative costs and commissions are far more important to your returns than the "performance" of the fund or how well your stocks do in any one year.

In fact, those who simply purchase very low-cost index funds -- a broad sampling of stocks from the entire market -- are far ahead of the game.

"I have yet to meet a retiree that couldn't have met his or her retirement goals just with market returns," Paul Merriman, the editor of FundAdvice.com and an investment adviser at Merriman Berkman Next in Seattle, told "The New York Times" earlier this fall.

So I decided to switch my IRA into low-cost, no-load index funds. It was very frustrating to learn that my existing account didn't provide no-load options, and that the "low cost" mutual fund I was signed up for actually had a high expense ratio of 1.75 percent.

I'm now in the process of moving my IRA over to Vanguard so I can keep my investing costs as low as possible, and opening a SEP IRA (Simplified Employment Pension IRA) so I can increase the amount I put away. Fidelity is another often-recommended broker with lots of resources for retirement planning.

Get ahead of tax time

An old-fashioned receipt spike, like you see in a restaurant, will help collect business-related receipts for better filing in chronological order, whether you use an online tool to record expenses or not.

Set conscious goals

It's natural to get stressed out when thinking about money. What helps me deal is to picture positive long-term goals. What's your vision for the year? Improving your credit score 20 points into the "good" range? A fully funded retirement account? Getting into "good standing" with Sallie Mae? Opening your bills right away instead of tossing them?

Write your goals on Post-It Notes and stick them next to your desk or on your bedside table. Or set up an online calendar reminder to pop up in a month or two.

When my reminder comes up on Feb. 1, I'll re-read this column to see how on-track I am. If anyone else has financial resolutions, please leave them in the comments; you're more likely to keep a public pledge.