Everyday we spend the majority of our productive hours trying to earn money. Unfortunately, hard-earned money is too easily spent. For many, financial planning is just hanging on until the next paycheck.
Living paycheck to paycheck without a plan to control spending and reducing debt is stealing from your financial future. We want to help you take the steps to lower your monthly payments, pay off your debt and start saving for a solid financial future.
Checking your credit score should be your first step. Your credit score is a numerical representation of your credit report. The better your report, the higher your score. The higher your score, the lower your risk. The interest rates you are charged can be increased or decreased depending upon your credit score. Your goal should be a credit score of 760 or higher, because you will receive the lowest rates with this score.
Lenders look at your score to determine your interest payment for credit cards, mortgage rates, auto loans, etc. Your score will make the difference between a high or low interest payment. High interest payments are a large reason why families are living paycheck to paycheck with no savings. Households must eliminate interest payments and debt if they are going to build financial security.
Contact each of the credit bureaus and get a copy of your credit report, because each report may have different information. Carefully look over the reports for misinformation or errors. You may be surprised to find forgotten accounts that were never closed and still appear on your credit report. An error could make a big difference in your credit score, causing you to have higher interest rates. If you have a low credit score, take action to increase your score. After your score increases, contact your creditors and ask them to lower your interest rates.
Here are the links to the three credit bureaus:
The next step is to make a budget, no matter how simple. If you are spending more than you make, you must reduce your spending or increase your income. A budget will help clarify the areas where you can cut spending. You can’t solve the problems unless you know where they are. A helpful way to do this is to use a program like Quicken that makes it easier to track spending and categorize your payments.
Pay down your credit cards. If you have a wallet full of credit cards and are close to your credit limit with each one, spend an afternoon to go over the rates and offers for each card. Focus on bringing your balances down on each card and bring your credit utilization (debt-to-credit ratio) to less than 25%. For example, if you have $5,000 in unpaid balances on three cards and a total credit line on the cards of $13,000, your debt-to-credit ratio is 38.5%. Bring your unpaid balances down to $3,000 and the ratio drops to 23%, which will help raise your credit score.
If your balances are close to your credit limit (75% or above), this is a dangerous place to be. Not only are you an emergency away from going over your credit limit and paying the fees and penalties, but creditors pay attention to how you handle credit. If you are close to the limit with a card or loan, even if it isn’t through them, they can increase your APR to the default rate which can be over 30%.
If you have a good payment history with your credit card issuer, call them and ask for a lower rate. If they say no the first time, try again in a couple of months. What difference will it make? Here is an example. If your balance is $5,100 you will pay $760 in interest per year if your APR is 15%. If your rate is 11%, you will pay $560. That saves $200 per year, you can save even more by applying that $200 to pay down your balance.
After you pay off your credit cards, pay off your auto and student loans.
Consider joining a credit union, they typically have the lowest rates and fees for credit cards, auto, mortgage, and personal loans. They also look at your total credit picture, not just your credit score, which may help you get lower rates.
Start saving for emergencies. It is good to have an emergency fund for 3-6 months of living expenses. Even if you are only saving $30 a month, it is a good start and it will add up. You do not want a car repair, home repair, medical bill, or job loss to pull you into deeper debt. You do not want to be in a situation where you have to use a credit card to pay for necessities like food, gas or housing.
Open a separate account for your emergency fund. A savings or money market account will pay a little interest and the money will be available, without penalties, when you need it. Get an account that does not charge fees because the fees take away the money you worked hard to save. If you are forced to use some of your emergency fund, set up a plan to regularly pay it back, just like you would a loan from your bank.
Emergency fund vs. paying off your debt. Pay the minimum on your credit card bill until you have $1,000 in your emergency fund. If you can save $100 a month for 10 months, you will have $1,000 in your emergency fund. Then focus on paying off your credit card debt.
Once you have reached your goal for your emergency fund, keep up your savings plan and put that money into a retirement account.
Another important step for financial security is insurance. An insurance policy from work is probably not enough. An accident or force of nature could destroy everything you own, leaving you financially ruined. If you have a family with children, get as much insurance coverage as you possibly can for auto, life, and home.
Maximize your retirement savings. Max out your 401(k) and your IRA plans. Most employers will match a percentage of what you put in.
If you have kids, open a college savings account with a 529 plan or a Coverdell education savings account. Here is a good place to start educating yourself about college savings plans.
Talk with an attorney to get a will or living trust. This directs what happens to your children and assets after you die. It is unpleasant to think about, but it is much easier to take care of this while you are alive. You don’t want loved ones to deal with their grief and the chaos and expense of court to sort through asset issues.
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If you are staring at a mountain of debt, building financial security may sound like someone else’s dream but impossible for you. Unfortunately, the longer you put off financial planning and debt reduction, the more difficult it will be. What you save today will pay for your retirement tomorrow. Getting out of debt and saving money are the only ways to relieve the financial stresses in your life.