Are you tired of struggling to make ends meet? Do you constantly worry about running out of money before your next paycheck? Do you find yourself juggling bills to make sure that you at least get the important ones paid?
You don’t have to live like this.
There are simple things you could do to get your personal finances under control. Where it begins is understanding how much you spend versus how much you earn. If you’re having problems financially the root cause is because you’re spending more than you earn. So, the first thing you need to do is change your spending habits so that you are earning more than you spend. This may seem obvious but it’s the foundation of smart money management.
Make a budget
Step two on your road to getting your personal finances under control is to create a budget so that you can build your savings. A study by Bankrate.com recently revealed that more than 60% of us don’t even have a couple of hundred bucks in an emergency fund. If this is true of you, you need to do better. The way you do it is by creating a monthly budget where you build up savings. Ideally you should have the equivalent of six months of your living expenses in savings. If this doesn’t feel realistic at least try for three months’ worth.
Create a plan
If you’re typical your most troublesome debts are probably unsecured ones such as credit card debts. If so, you need to make a plan to get them under control. One of the most popular ways to do this is by “snowballing” those debts. This is a strategy developed by Dave Ramsey and it’s worked for thousands of people. Just make a list of your debts ranging from the one with the lowest balance down the one with the largest. Then focus all of your efforts on paying off the debt with the lowest balance – while continuing to make at least the minimum payments on your other debts. You should be able to get that first debt paid off fairly quickly, which will free up money you can use to pay off the debt with the second smallest balance and so on.
You don’t need to close your credit card accounts but you should stick your credit cards away in a drawer somewhere and use cash for your everyday expenses. Now that you have a budget you should have a handle on your everyday spending. Calculate the amount you spend each month, divide it in half and then take that amount in cash when you are next paid. The odds are overwhelming that you’ll end up spending less because psychologically it’s just a lot harder to take out the cash to pay for something than to swipe a credit card. If there is some reason why you can’t use cash for your everyday expenses then at least use a debit card rather than a credit card. While it’s easier to swipe a debit card then to pay cash for something it will at least keep your spending in check because when you zero out your checking account that’s it. You just can’t spend anymore without going into overdraft, which is also a bad thing.
Work on your credit score
Having a low credit score will cost you money in the form of increased interest rates and higher insurance premiums. If you don’t know your credit score you need to learn what it is. You can get it free from any of the three credit reporting bureaus – Experian, TransUnion or Equifax – or from a site such as CreditKarma. You’ll probably find you have a low credit score of 600 or less. If this is the case you need to get to work improving it. Your credit score is made up of five components. The biggest, which accounts for 35% of your score, is your credit history and you can’t do anything about it. However, the second largest factor – credit utilization –, which accounts for 30% of your score – is something you could work on. The way it’s calculated is by dividing the amount of credit you’ve used by the total amount of credit you have available. For example, if you have total credit limits of $10,000 and have used up $5000 of it your credit utilization would be 50%, which is way too high. Do the math to see what’s your credit utilization ratio. If it’s higher than 30% this is something you could affect by paying down some of your debts or by getting an increase in your credit limits although this is much easier said than done.
Review your credit reports for errors
You can get your credit reports free once a year from the three credit bureaus or on the site www.annualcreditreport.com. Review your reports very carefully as they could contain errors that are dragging down your credit score. A study done last year by the Consumer Financial Protection Bureau found that at least 5% of us have errors in our credit reports that are dragging down our credit scores. And who knows? You might be one of that 5%. If you do find errors it’s important to dispute them by writing a letter to the appropriate credit bureau. If you have documentation supporting your claim the credit bureau must by law contact the institution that provided the information and ask that it be verified. If it can’t verify the information or if it fails to respond within 30 days the credit bureau is required to remove the item from your credit report – which could cause it to take a healthy bump up.
Find the negative items
The other thing to look for on your credit reports are negative items such as late payments, charge-offs and accounts that have gone to collection. Then do what you can about them. If you have late payments try to catch them up. Charged off accounts may have been charged off but you still owe the balances. If you pay them off it will improve your credit score. The same is true of accounts that have gone to collection. You will need to contact the debt collection agency to see what you can do to get the balance paid off or to negotiate a settlement.
Get some counseling
If all of this seems a bit overwhelming you might try consumer credit counseling. You should be able to find a credit counseling agency where you live or, failing that, on the Internet. In either case you’ll have a counselor who will review your finances and help you create a budget and a Debt Management Plan (DMP). Your counselor will present this plan to your creditors. If they accept the plan you won’t be required to pay them. Instead, you will send a check each month to the credit-counseling agency. You will have to give up any credit cards that are in your DMP and not take on any new debt until you complete your plan, which typically takes five years. However, at the end of those five years you would be debt-free and should have learned to be a very smart money manager.
If you’re unfamiliar with consumer credit counseling here’s a short video, courtesy of National Debt Relief, that explains what it is and how it works.