In my first article in this series, “Creating a Solid Foundation to Clean Up and Manage Your Finances”, I explained the first three steps in my nine-step program to clean up and manage my family’s finances. I know better than to allow my personal finances to slip into chaos; however, I did it slowly without much thought. When listening to a client (I work in a bankruptcy firm) try to justify why they were in this situation, I realized that I needed to create a solid foundation based on organization in order to take control of my bills and finances. After that foundation was established, I could begin to build upon it to untangle the mess my husband and I had created with our finances. Continuing from step three,
Step 4 – Order a copy of your credit report. Many people have never reviewed a copy of their credit report nor do they know what is being reported on it. The only time I cared about my credit report was when I needed a good credit score to buy an automobile. However, credit reports are much more than just a credit score and everyone should review their credit reports periodically.
You are entitled to receive a free copy of your credit report from the three major credit reporting agencies every 12 months. Visit www.annualcreditreport.com to obtain free copies of your credit reports online. Once you have your credit reports, first review each report thoroughly, make notes of any discrepancies and report them immediately to the credit reporting agency. Second, make a list of all accounts that are open on your report and the balance due on each account. This will be the beginning of your monthly budget. If you followed step 3 (purchasing and setting up bookkeeping/accounting software), you need to enter each creditor into the software including the terms of payment (not just the balance owed). Print a list and move on to step number 5.
Step 5 – Put down in black and white every debt you owe. This step was probably the most shocking for my husband because he has the ostrich syndrome (sticking his head in the sand) to avoid unpleasant matters such as paying bills. Compare the list of bills that you entered from your credit report to the actual statements you receive each month and update the figures as needed. Also, add any additional bills that were not being reported on your credit report, including utilities, so that each and every debt/bill that you owe is entered into the software.
Print a list of all of your debts and begin to prioritize the bills into categories – – secured (house, car, etc.), utilities, credit cards, tuition, student loans, etc. You may be able to print this list directly from your accounting software, which is a great advantage of having this as part of your solid foundation. Once you have this master list of bills that you owe, you can then go to the next step – – creating a monthly budget.
Step 6 – Creating a monthly budget. This may sound elementary but people who write down their monthly budgets keep track of spending better, pay bills on time, save more money and know more about their overall financial situation.
Beginning with the list of bills from Step 5, list each bill in a category of priority – – secured debts first, utilities, necessary monthly bills (i.e. daycare) and then general unsecured debts by order of priority within that category (student loans would come before a credit card for instance). Then list monthly expenses that you pay each month such as food, transportation, medical & dental expenses, clothing, cleaning supplies, insurance payments, etc. Provide a monthly amount for savings (even if it is only $10 per month to begin) and expenses (“incidentals”) that may occur that are not usual (i.e. doctor’s visits, medicine, replacing a tire, etc.). If you do not use the money set aside for incidentals during the month, add that to the amount you save. However, do not forget about yearly bills that you must pay (property taxes, insurance, etc.) and budget for those – – we generally have a separate savings account and put 1/12 of the amount of each bill in there per month.
Now subtract your monthly expenses from your total monthly income to determine what amount you have each month to pay down debt. If you are negative, you will need to review your expenses to see which ones you can trim (cutting out extras, turning off cable television, etc.) Any extra funds, above savings, should be used to reduce your income-to-debt ratio. Review your debts to determine how much you can pay toward each one each month to pay them in full as soon as possible. One strategy is to pay the bills with the highest interest rate first to save on interest. Some people need to feel that they are accomplishing something and prefer to pay off the smallest balance first so they can feel they accomplished a goal. Then they move on to the next smallest and so on until all of their credit card debt is paid in full. Monthly budgets are very important – – they help keep your finances organized, help you save money and assist in paying down debt.
My husband and I are almost finished with Step 6 – – we have a list of all of our debts and monthly expenses (which is more than a little frightening) and we have created a workable budget. We track everything through Quicken and pay bills at the end of each week rather than allowing them to accumulate (we spend the money and have none to pay bills if we do not). We actually have a weekly budget since both of us are paid weekly. I organized our bills by due date, placed as many as possible on automatic draft, so that at the end of each week we pay bills, then weekly expenses, then savings and finally extra money toward the bill we are paying down now. We are now ready to move into Part 3 of our financial makeover – – “Getting Past Living from Week to Week, Paycheck to Paycheck” which is also here on Associated Content.