Only You Can Improve Your Financial Picture. Start This Week
Aside from the emotional repercussions resulting from a divorce, one of the biggest challenges newly single people face is getting a firm grip on their personal finances. If you’re now on your own, this isn’t something that can wait too long to deal with, or you could find yourself experiencing significant financial problems in the not so distant future. As the new year rolls around, there’s no better time to start taking better control over your money. True financial stability means much more than living paycheck-to-paycheck without planning for your future. So, if you’re open to establishing a few New Year’s resolutions relating to your financial life, here are our five suggestions:
1: CREATE A BUDGET (and stick to it).
It’s impossible to take control over your personal finances if you don’t have a firm grip on how much money you earn, plus how much money you spend each month. One of the easiest ways to set up a personal budget for yourself is to begin using a personal finance software package, such as Intuit Software’s Quicken. The easy-to-use starter edition of this software (available for PC or Mac) can be purchased wherever software is sold, or downloaded from the Quicken website.
Begin by carefully analyzing how much money you spend each month. Review all of your bank statements, credit card statements, bills and receipts for the past three to six months. Next, using a pad of paper, create these three separate lists:
First, list all of your fixed expenses.
These are absolutely necessary expenditures that are constant every month, such as your rent/mortgage payment, alimony payment (if applicable), and car payment.
Make a list of your regular monthly expenses.
These can vary each month, such as your utility bills (gas, electric, phone, etc.), as well as your cable TV and cellular phone bills, commuting expenses, and car-related expenses, etc. On this list, calculate your average monthly expense for each item.
Make a list of your frivolous expenses.
(You’ll probably be surprised how many of these expenses pop up on your list as you review your credit card bills, bank statements and receipts.) This is money you spent, but didn’t have to.
As you create your list of frivolous expenses, pay attention to all of those small, spontaneous purchases, such as gourmet coffees, new clothing purchases (made because something was on sale), and your entertainment expenses. Now that you’ve discovered exactly how your money is being spent, determine if you’re spending more each month than you’re actually earning. One quick indication of this is if you regularly tap into your savings account or rely on credit cards to pay your monthly living expenses.
If you’re spending more than you’re earning, it’s immediately necessary to take better control over your spending and cut costs. Otherwise, you are virtually guaranteed to run into potentially serious financial problems in the not so distant future. At the same time you’re figuring out creative ways to cut costs, begin formulating an organized, monthly budget for yourself. This budget should be put in writing (or be displayable on your computer), so it can be reviewed on an ongoing basis.
You already know how much you’re earning (plus how much you receive in alimony, if applicable). Now, your goal is to use a software program, such as Quicken or Microsoft Money Plus, and potentially your bank’s online banking services, to keep better track of your day-to-day finances while at the same time better controlling yourself when it comes to frivolous expenses.
Just because a gorgeous pair of shoes or a new outfit is on sale, it doesn’t mean that you absolutely must expand your wardrobe. Getting caught up in the hype created by advertising and marketing is a guaranteed way to spend more money than necessary, especially on items you don’t actually want or need. One lesson you might need to learn is to stop spending money you don’t have, in pursuit of bargain items that you have no use for. There’s a huge difference between genuine need and perceived need that’s created by advertisers and marketers hoping to sell you their products.
Sticking to a monthly budget will be easier once you adopt an organized method of record keeping (using personal finance software, your checkbook or a paper-based ledger). Going through the motions of creating a budget isn’t enough, however. You must make a conscious effort to stick to that budget, month after month. If you need help organizing your personal finances and initially creating a budget, consider sitting down with an accountant or personal financial planner for a few hours to help you get started. A little extra effort now will help you to spend more wisely in the months and years ahead.
2: LOWER YOUR MONTHLY BILLS.
Now that you know what your monthly bills include, take a close look at the items on your second list of expenses. Determine ways to lower each of the expenses associated with the items on your list. Here are a few suggestions:
Switch to a less expensive cellular phone service plan.
If your cell phone bill gets out of hand each month, consider switching to a pay-as-you-go plan. The calls will cost more, but you won’t be able to overspend each month as a result of using up your minutes, roaming or other charges.
For your regular home telephone service, consider switching to a flat-rate plan that includes unlimited local and long distance calls.
You can also potentially save money each month by switching to a Voice-Over-IP Internet phone service, such as Vonage, as opposed to using traditional telephone service.
While you’ll probably want to keep your cable TV service, consider giving up some of your premium channels, which you pay extra for each month.
It might also be cheaper to switch to satellite television. Of course, you could give up cable TV altogether.
To save on your monthly heating bill in the winter, lower your thermostat to 68-degrees F (instead of keeping it at 72-degrees F).
You could also add better insulation to your windows and stop drafts around doors to better retain heat and ultimately lower your utility bills.
Determine if there’s a way to lower your car insurance premium, without compromising your coverage.
Shop around for better deals with other insurance providers. Another option is to raise your deductibles from $250 to $500, or from $500 to $1,000, if applicable, to lower your premiums. If you’re being penalized for having a poor driving record, determine if you can take a defensive driving or safety course to improve your record and save yourself money on insurance premiums.
If you have a mortgage, consider refinancing to lower your interest rate.
(Based on current economic conditions, you’re probably better off with a standard, fixed-rate mortgage.) This could potentially save you hundreds of dollars each month. Also, if your monthly car payment is extremely high, look into refinancing that as well. Credit unions typically offer very competitive car (re)financing deals.
As your quest to cut costs continues, take a good look at your third list “ your frivolous expenses. Determine what you can cut out entirely, without significantly lowering your standard of living. You may discover you can save several hundred dollars per month, just by reducing your frivolous expenses. For example, if you’re like most people, you might be hooked on gourmet coffee from Starbucks. Instead of visiting Starbucks two or three times a day and spending $3 to $5 for each drink, invest in a coffee machine and make your own coffee at home or at work.
3: YOUR CREDIT CARD DEBT.
If used inappropriately, credit cards can cost you a fortune in fees and interest charges. Ideally, when you use a credit card, you should plan on paying off your monthly balance at the end of each billing cycle. This eliminates interest charges altogether, but allows you to enjoy the convenience of shopping using a major credit card.
Assuming you’ll be maintaining a balance on your credit cards (which most people do), it’s essential that you pay more than the minimum monthly payment due each month. Otherwise, it could take you decades to achieve a zero balance, even if you stop adding new charges to that credit card. Whatever you do, avoid being late on a payment or skipping a payment altogether. Also, avoid going over your credit limit. Not only will these actions result in high fees from the credit card issuer, it’ll also lower your credit score. Plus, your interest rate will most likely switch to what the credit card issuer refers to as its default rate.” This could be double or even triple the amount of interest you’re currently paying.
It’s also important to understand all of the fees your credit card issuer charges. For example, many banks charge up to $15 to make a telephone payment. All credit card issuers also charge high fees and interest rates for cash advances. According to Consumer Action, if you take a $100 cash advance for only one month, it can cost you $12.02 in fees and interest. Annualized, that’s about 144 percent interest.
Consumer Action also reports that nearly half of the 47 banks and credit card issuers surveyed in 2007 now penalize cardholders for any negative changes to their credit report or credit score. Some of the reasons why a credit card issuer will begin charging its default rate (which can be up to 32.24 percent or higher), include:
• Your credit score drops for any reason
• Late payments were made for a mortgage, car loan or to other creditors
• The credit card holder went over their credit limit (even by a few dollars) The card holder bounced a check and it got reported to the credit bureaus
• The card holder has accrued too much debt
Very few card companies will admit to the universally decried practice of universal default,” said Linda Sherry, director of National Priorities at Consumer Action. “But it’s compelling that nearly all of the top 10 issuers reserve the right to change the terms of your cardholder agreement at any time for any reason, including in many cases, explicit references to credit information.”
If you’re already maintaining high credit card balances, determine what interest rate you’re paying on each card. Invest the time to shop around for lower interest baring credit cards and transfer your balances to those cards.
Creditcards.com, for example, will help you shop for the best credit card deals. Consumer Action also publishes an annual list of low-interest credit cards, which can be found here.
Another option is to consolidate multiple, high-interest credit card balances into one, low-interest consolidation loan. Depending on the amount of debt you’re carrying, it might make sense to work with the National Foundation for Credit Counseling (800-388-2227) or a similar non-profit organization to establish a Debt Management Plan (DMP). This will allow you to consolidate your credit card debt, while also lowering the fees and interest rates being charged by your creditors.
4: IMPROVE YOUR CREDIT SCORE.
Your credit score is calculated by the three credit bureaus (Equifax, Experian, and TransUnion), and is based in large part on your positive or negative history with your past and existing creditors/lenders. Your credit score is used by creditors and lenders to make their approval decisions, plus plays a significant role in determining what interest rate and fees you’ll pay as a consumer applying for any type of loan or credit.
There are many steps you can take to begin improving your credit score. First, review copies of your credit report from each of the three credit bureaus (also referred to as credit reporting agencies) and have any incorrect information listed on your reports fixed. This can be done online, by telephone or by U.S. Mail, by initiating a dispute. To obtain free copies of your credit reports, visit the www.annualcreditreport.com website. This is the only official site that should be used to obtain a free copy of your credit reports from Equifax, Experian and TransUnion. Beware of imposter web sites with similar and misleading web site addresses that ultimately charge for the services offered. (You could also visit each credit bureau’s website site separately to obtain each of your credit reports.)
After correcting inaccurate information on your credit reports, make a habit of paying all of your bills on-time, each and every month. Once you do this for six to 12 months, you’ll notice a spike in your credit score. Even one late or skipped mortgage, car or credit card payment, for example, will result in a significant and almost instant drop in your credit score. It could then take many months of on-time payments to bring your credit score back up.
Paying down your outstanding debt, refraining from applying for too many credit cards or loans within a short time period, paying off accounts that have gone to collections,” making sure no future accounts are turned over to collection agencies for non-payment, and negotiating with your creditors and lenders to remove negative information from your credit reports (upon making payments or paying off debts) are other ways to boost your credit score over time.
Also, if you anticipate having trouble making your monthly payments, contact your creditors and lenders in advance. Often, you’ll be able to establish a payment plan that will help protect your credit score. Ideally, this should be done in advance, before you’re late or miss one or more payments.
When reviewing your credit score, make sure you’re looking at your official FICO score, calculated by Fair Isaac Corporation. This is the credit score more than 80 percent of creditors and lenders rely on. Credit scores range between 300 and 850. The higher your credit score is, the better. If your score drops below 650, you’ll probably have a difficult time getting approved for any type of loans or credit, because you are considered a high risk based on a poor payment history and inability to properly manage your debt in the past. According to Fair Isaac Corporation, approximately 73 percent of all Americans have a credit score higher than 650, but only 13 percent of consumers have a FICO score higher than 800 (meaning they have excellent credit).
To learn more about your official FICO Score, download the free booklet, Understanding Your FICO Score, which is published and distributed by Fair Isaac Corporation.
5: CREATE AN EMERGENCY FUND.
As you go about your everyday life, bad things sometimes happen. To help protect yourself against potential problems, establish an emergency fund. Financial planners recommend maintaining a savings account that contains enough money to cover at least three month’s worth of living expenses. Even if you’re not in a position to set aside that much money right now, establish an emergency fund of any size by opening a savings account at a bank that is separate from your regular account(s). Then, each and every month, deposit a pre-determined percentage of your discretionary income, say five to 10 percent, into this fund.
Even a deposit of $50 to $100 per month will add up over time. As you’re building up this account, you’ll be well on your way to protecting yourself against financial hardship. One way to find” the cash to deposit into an emergency fund each month is simply to place a large jar on your bedroom dresser. At the end of each day, dump the loose change you’ve collected into the jar. You’ll most likely collect at least $100 to $200 per month that can be deposited into your emergency fund.
Just some of the reasons why people are forced to tap into their emergency funds include:
• Loss of a job
• Sudden illness or injury
• Emergency car repairs
• Unexpected repair bills relating to your home or a major appliance
• You’re forced to pay a sizable bill of some kind that you weren’t expecting
Being able to use an emergency fund to cover unexpected (emergency) expenses will help keep you from relying on credit cards to get you out of difficult financial situations, plus help protect yourself from creating long-term financial problems. In addition to maintaining an adequate level of homeowner’s/renter’s insurance, car insurance, health insurance and life insurance, for example, another type of insurance that’s worthwhile for many people is long-term disability insurance. This type of optional insurance will cover your expenses (up to a predefined limit) if you become ill or injured, and are unable to work for an extended period of time. While many employers offer this type of insurance as part of their compensation packages, if you don’t have it, long-term disability insurance offers an added level of financial protection for yourself and your kids, should something happen to you that prevents you from earning a paycheck.
Start the Year Off Right!
With this new year will probably come a period of adjustment as you re-establish your life as a single person and begin rebuilding various aspects of it. During this period of change, make a conscious effort to focus on improving your personal financial situation by adopting fiscally responsible spending and saving habits.
Depending on your unique financial situation, not all five of these potential financial goals may be applicable, so develop a plan that meets your needs and financial objectives. Also, keep in mind that achieving the majority of these financial goals will take at least several months (or longer), so the sooner you get started, the better. By taking an active, responsible and persistent approach to taking control over all aspects of your personal finances, you’ll be able to ring in the new year as a much more financially stable individual — potentially with a respectable credit score, more money in the bank, and the ability to live well (but within your financial means).
