Personal Finance

Here's what's derailing your financial resolutions

Key Points
  • Sixty-three percent of Americans experienced a "financial setback" last year, a new survey finds.
  • Experts say even a small emergency fund of $400 to $500 could help you stay on track with financial goals.
Here’s the 411 on how to kick-start your emergency fund
Here’s the 411 on how to kick-start your emergency fund

A decent rainy-day fund could be vital to keeping your New Year's goals.

Among the nearly 7 in 10 adults who plan to make a financial New Year's resolution, 40 percent have a goal of setting and following a budget, according to a forthcoming report from the National Endowment for Financial Education. Getting out of debt is a resolution for 39 percent, while 32 percent want to establish savings and 31 percent hope to boost their retirement savings.

The organization polled 2,165 U.S. adults in mid-December.

We have to change our mindset and realize that these expenses are not if they will happen, but when they will happen. Emergency savings can alleviate uneasiness.
Ted Beck
National Endowment for Financial Education

But there are plenty of roadblocks to meeting those goals: Sixty-three percent of those surveyed said they experienced a "financial setback" in 2017. Common financial shocks included transportation (23 percent), housing repairs or maintenance (20 percent) and an inability to keep up with debt payments or bills (16 percent).

That trend could easily be repeated in 2018, with Americans expecting their three largest expenses to include paying off debt, home expenses (excluding their mortgage) and transportation expenses.

Consumer debt keeps climbing

Category Quarterly change (from Q2 2017) Annual change (from Q3 2016) Total as of Q3 2017
Mortgage debt(+) $52 billion(+) $393 billion$8.74 trillion
Home equity line of credit(-) $4 billion(-) $24 billion$448 billion
Student loan debt(+) $13 billion(+) $78 billion$1.36 trillion
Auto loan debt(+) $23 billion(+) $78 billion$1.21 trillion
Credit card debt(+) $24 billion(+) $61 billion$808 billion
Total debt(+) $116 billion(+) $605 billion$12.96 trillion

Source: Federal Reserve Bank of New York

"We have to change our mindset and realize that these expenses are not if they will happen, but when they will happen," Ted Beck, president and CEO of NEFE, said in a statement. "An emergency savings, even a modest amount as a starting point, can alleviate uneasiness."

Here's how to prepare to better weather financial setbacks in 2018, without giving up on your New Year's resolutions.

Create a savings floor

Financial advisors typically recommend building to have three to six months' worth of expenses set aside. But even a small rainy-day fund can help, said Pamela Capalad, a certified financial planner and founder of Brunch & Budget in Brooklyn, New York.

"Have the floor on your savings be $400 or $500," she said.

That's enough to cover a moderate unexpected expense — so you don't need to pull out your credit card and set back your other financial goals, Capalad said. Aim to replenish those savings quickly if you do need to tap them.

In foundation's survey, 36 percent of consumers said they would need to use credit to cover an unexpected expense, versus 31 percent who would use emergency savings and 28 percent, cash.

Look ahead

Some financial shocks aren't a surprise, said Kevin Meehan, a certified financial planner and the regional president of Wealth Enhancement Group in Itasca, Illinois.

If you can see, for example, that your aging refrigerator is acting up or that your kid is probably going to need braces, use that as an opportunity to reassess spending and build savings to help handle that eventual expense.

"If you see something coming, that's where you go back to need versus wants," Meehan said. "You'll have to weigh putting off discretionary purchases in favor of preparing for that."

Jamie Grill | Getty Images

Assess your resources in the event of an unexpected financial setback, he said. It helps to know what assets you have available to use, and if you must take on debt, which avenues (such as a home equity line of credit or a zero-percent balance transfer offer) might be least damaging.

Stop the cycle

"People end up being trapped in the credit card cycle, where they are constantly catching up," said Capalad.

Breaking out requires a concerted effort. First step: Curtail new credit card debt.

Shift recurring purchases to a debit card or checking account, she said. Do the same with discretionary purchases that can add up fast, such as ride-sharing or takeout delivery.

Then come up with a plan for tackling your existing debt.

Focusing on your most expensive debts first can help you pay less in interest and speed repayment, said Meehan. But pay attention to timelines, too, such as an end to balance-transfer or deferred-interest offers. A looming deadline can make those debts a higher priority.