Did you ever have a class or course in personal finances? If you’re typical, your answer to this was no. Most people grow up knowing very little about personal finance. They just sort of stumble along, learning more from their mistakes than their successes.
Personal finances aren’t very exciting, either. The idea of having to sit down, go over all your expenses is about as exciting as watching grass grow. We all have good intentions when it comes to our personal finances but like our New Year’s resolutions we usually let them slip after just a few weeks. There just always seems to be things to do that are more interesting than reviewing your personal finances. There’s that game on television you’ve been waiting a week to see, that great movie that just became available on Netflix or that get together with your gal pals or guy friends.
The sad fact is that you could be in trouble financially without even knowing it because you haven’t been taking your finances seriously. And here are six signs this is probably true.
You live for your next paycheck
According to the website CNN Money about 75% of all Americans are living from paycheck to paycheck. Do you fall in this category? Or worse yet, do you find yourself constantly scrambling just to buy groceries, pay the rent or keep your lights on? That’s a sure sign you’re not taking your finances seriously enough. What you need to do is review your bank and credit card statements looking for nonessential expenses you could cut out. You need to ask yourself questions like, “do I really need $100 worth of cable?” “Am I really using my health club membership frequently enough to justify the $60 a month?” “Do I really need to eat out so often?” The odds are you’ll be able to find areas where you can cut back so that you’ll run out of months before you run out of money.
The balance in your savings account is $0
Putting money away into your savings account may not be your number one priority but it should be. Having an emergency savings account is the only way you can cushion yourself against those rainy days that fall into everyone’s life. While you can’t know when you’ll have a financial emergency, you can bet that you will have one. It might be a costly car repair, a trip to the ER or because your furnace died. If you don’t have money in your savings account to cover an emergency like this your only option will be to fall (further) into debt.
What you should do is set up an automatic transfer from your checking to your savings account of 10% or if possible, 15% of your paycheck. You’ll hardly miss the money because you won’t really see it. But you’ll eventually have an emergency fund so there’ll be money to get you through that rainy day when it does hit.
If you applied for credit and were turned down this is a pretty good sign that your personal finances have damaged your credit score.
There are now several credit card companies that provide their cardholders with their FICO credit scores each month. If you’re not getting yours this way, there are places where you can get it free such as CreditKarma.com and CreditSesame.com. It will also be available at MyFICO.com.
The reason why your credit score is important is because lenders use it to decide whether or not to give you credit and at what interest rate.
If you have a low score (less than 600) it may be because you have a high credit utilization ratio. This ratio is calculated by dividing the total amount of credit you have available into the amount you’ve used. If you do the math and find you have a credit utilization ratio of 40% or higher, this is damaging your credit score. Once you begin paying down some of your balances your credit score should get a nice boost.
You make late payments
Everyone makes mistakes and just about everyone misses a payment occasionally. But if you do this on a regular basis it’s no longer a little mistake. It’s a pattern.
When you make late payments, you get hit with fees that just add to your debt. The late fees charged by credit card companies generally range from $27-$38. While this may not seem like a lot of money it can add up if you’re getting hit with these fees a regular basis. Plus, late payments will lower your credit score, which will hurt your ability to get new credit and loans going forward.
You can ensure this doesn’t happen by setting up automatic bill payments with your bank and credit card companies. You can also use apps such as Mint Bills that will send you a reminder when you have a bill that’s due.
You don’t have a budget or spending plan for your personal finances
You probably have some idea of how much you’re spending each month but you’ll never get ahead financially until you know precisely where your money is going and, more importantly, where you want it to go.
You need to start by writing down every one of your expenses. And you must be honest with yourself by including everything – right down to that $1 drive-through coffee you got just once. You also need to include dinners out with friends, shopping, groceries after-work drinks – everything.
You may be shocked when you review a months’ worth of spending because the odds are you’ll find you’re spending money on a lot of things that are not absolutely essential.
When you know this, you should be able to trim your personal finances to reach your goals, whatever they might be. But don’t start making changes without a plan. One thing experts advise is a zero-sum budget. This is where you give every dollar you earn a purpose. Begin with the amount of money you earned last month and divide it into expenses and bills for the upcoming month. Then put whatever you have left over towards reducing your debt or increasing your savings – before you can spend anything.
Here’s a brief video that provides more information on personal finances, zero-based budgeting and how you could use a smart phone app to create and stick to your budget.
You’re carrying a big load of debt
Is student loan debt a big part of your debt? It’s tough to eliminate it in a short amount of time. But if you have credit card debts you’re having a problem paying off, you’ll need to make some changes. Your credit card debt will be increasing even if you put no new charges on your cards because of the astronomical interest you’re paying and because of that old devil compounding.
One of the best ways to deal with high interest credit card debt is to get a lower-interest debt consolidation loan and pay off all your credit cards. You’ll then have a lower monthly payment and a fixed term – or a date when you know you’ll have the loan paid off. Lower monthly payments mean more you’ll have more money to put towards your financial goals. Plus, it’s much easier to remember to make just one payment a month than the multiple credit card payments you’re currently making.