Friday, November 14, 2008

Strengthening Your Personal Finances: Some Guidelines

1) Review Your Credit History

Many of us never bother to check our credit score or review our credit history unless we're preparing to apply for a loan, but it doesn’t hurt to examine your credit history at any time to check for potential errors. Check for any incorrect or outdated information, and dispute anything that is inaccurate. Resolving incorrect or incomplete information may take time, so it pays to address the issue directly rather than risk affecting any potential credit needs in the future.

2) Are You "In the Red"?

Are you spending more money than you're earning on a monthly basis? The variety and ease of credit has helped many of us lose site of the bottom line. Evaluating your cash flow is the first step towards realizing stronger financial footing.

3) Create an Itemized Budget

Once you've established your overall expense to income ratio, create a detailed, itemized budget of your monthly expenses if you don’t already do so. When calculating expenses that can fluctuate from month to month (such as the cost of gas, groceries or energy bills) be conservative and round up. Always be honest about the expenses you see from month to month – after all, you'll only be cheating yourself on anything you "fudge". Seeing your actual expenses on paper makes it far easier to decide what is necessary and what can be cut.

4) Trim Excess Spending

With your monthly budget in hand, you're now equipped to start reducing spending. Some experts will tout the need to avoid "large expenses" such as big screen TVs, new cars or big vacations. While minimizing spending splurges is obviously prudent in tougher times, it's unrealistic to think that most consumers will be able to save thousands of dollars from their monthly budget by crossing off one or two purchases (those of us who don’t buy an iPod-a-month, anyway).

Generally speaking, cutting spending is a more practical matter of determining what you don't really need or need as often. For example, if you typically go out to eat two times a week, consider cutting that in half. Keep an eye on your buying habits at the grocery store, which can be an easy trap for expensive, unnecessary "impulse" buys. Augment your entertainment budget by renting music and movies from your local library. The little steps you take here and there will add up to noticeable monthly savings.

5) Minimize High Interest Debt

Unlike home or student loans which have lower interest rates, the high interest rates of credit cards make carrying a large balance a financial burden. Avoid carrying any sort of significant balance on a credit card whenever possible – you want to (at most) carry a balance that remains less than 25 percent of the maximum avilable credit limit.

  • Have a Payment Plan – Making only the minimum required payment is not a realistic strategy for resolving credit card debt. Instead, set a goal date for when you want your card paid off and budget out payments accordingly. If you have multiple cards, pay off the credit card with the highest interest rate first. Once the first card is paid off, roll the amount you were paying on that card into the payment plan for the next card with a balance, and so on.
  • Pay Attention to Changes in Interest Rates – Credit card companies are required to provide you notice of any changes in the terms of your contracts, but often consumers toss these notices tossed aside as "just more junk". Changes in the interest rate or minimum monthly payment can significantly affect both your payment plan and the urgency for paying off the balance. Make sure to always carefully review any correspondence from your credit card company.
  • Avoid Using Credit – Ideally, your credit card should only be used in the event of an emergency such as an expensive repair or unexpected medical expense. Avoid using your credit card for routine purchases such as groceries, gas or bills. If you're planning a vacation, save the necessary amount of money and use a debit card or traveler's checks when on the road.

6) Have an Emergency Reserve

While it’s not necessary to start stuffing hundred dollar bills under your mattress (the Federal Deposit Insurance Corporation now insures savings and checking accounts at banks and savings & loans for up to $250,000, making banks a perfectly safe place to store your money), having easy access to a store of liquid assets is important. Ideally a "rainy day fund" should amount to several months worth of monthly budget and should be in an accessible account (rather than tied up in a bond, line of credit, etc).

7) Invest in Your Company Retirement Account

Many individuals make the basic mistake of not contributing to their employer-provided retirement account. Almost all companies who provide a retirement plan will match their employees' contributions up until a given threshold (a percent of your annual income). By not putting at least enough money into your retirement account to receive matching funds from your employer, you are essentially agreeing to leave available funds (between 3 to 5 percent of your annual pay) on the table.

8) Conserve Energy

The volatility of energy markets can easily result in fluctuating utility bills that leave homeowners in the lurch. To minimize the unpredictable impact energy has on your budget, make a point of conservation:

  • Turn the thermostat down 2-3 degrees – A little mild discomfort will be offset by far greater energy savings.
  • Wear warmer clothing at home during the winter – You may prefer to roam around in your favorite t-shirt and shorts combo, but dressing the season will make it easier to scrimp on use of the heating system. Besides, the "bundled" look is in for the fall and winter months anyway.
  • Program your thermostat – avoid running your heating while away at work or asleep. If you don't already have a programmable thermostat, make a point of manually turning off/down the heat while away.
  • Save gas by combining errands – You can spend a lot of fuel money by running errands one day at a time. Instead, combine those drive-around chores whenever possible to economize gas.
  • Update your home's weather-stripping – Replacing cracked or worn weather-stripping around doors and windows is relatively inexpensive, and can greatly impact your home's heating efficiency.

The article is taken from one of our recent Newsletters that was e-mailed to all registered subscribers, via our RE/MAX of New Jersey web site.

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Copyright 2008 by Lawrence Yerkes. All Rights Reserved.

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