Starting the New Year with an assessment of where you are and what progress you have made over the last 12 months, will create an environment where you can move forward. It essentially gives you a starting point for your short term and long term goals.
ere are Here are 7 Strategies to Help You Assess Your Current Financial Status:
- Were any payments missed or late in the previous year? With credit cards, a payment that is even a single day late, can result in late fees averaging $35 per event. A late or missed payment could wind up as a negative reflection on your credit file potentially reducing your credit score. When this occurs, it drives up lending costs and can make it more difficult to qualify for rentals or other applications that use credit parameters. Late payments are also an early indicator that you are headed for financial trouble because you are living beyond your means. Using credit cards to supplement your income is never an effective long-term strategy.
Solution: Establish a budget. Watch expenses carefully for at least a month to understand where income is being spent, and then create a realistic budget to keep these expenses in line with the income you are receiving. If tracking expenses feels too difficult, review debit and credit card purchases for the previous 30-day period and you will get a good idea of how much you spend in each major category.
- Was money saved on a regular basis? Building an emergency fund with a few dollars each pay period can help you stay on track financially. Setting aside just $10 per week will accumulate two $520 in a year, giving you access to emergency funds when unexpected expenses occur. If there does not appear to be enough in the budget to put anything away, simple cutbacks like brown bagging lunch once a week can provide the extra funds needed to contribute to your emergency account.
Solution: Automate savings. One of the easiest ways to get in the habit of savings is to create an automatic transfer directly from your paycheck into a savings account each pay period. This can also be accomplished with a transfer from checking to savings. Soon, you will not even notice the small amount missing from your budget because it automatically happens. Many banks offer accounts with low or no minimum balance requirements. Some accounts round up purchases to the nearest dollar as a way to increase the amount you are able to save each month. These strategies will not feel like cutbacks.
- Did you increase your retirement balances? When high interest rate debt exists, logic says you should eliminate retirement investing and use those funds to pay down debt. However, not establishing a habit of saving for retirement can leave you nearing retirement age with no funds available to pay for it. Retirement accounts are popular because they offer tax benefits which can increase the amount saved without impacting your current budget as much because you are using pre-tax dollars. This feature allows you to set aside more money faster, while reducing the impact of your paycheck.
Solution: Participate in retirement programs available at work. Begin with a percentage you feel comfortable with and then increase that amount by 1% every year. You will be surprised at how small an impact it has on your paycheck, but a large impact on retirement balances. This strategy can grow retirement balances exponentially in a cost-effective way. Those without a work retirement plan can contribute to an IRA with similar benefits.
- Has your credit been monitored during the year? Identity theft is increasing and thieves are getting smarter about ways to steal from you. Waiting for the bank to notice unauthorized charges could leave you responsible for us the illegal use of your card, if you don’t catch the charges on your statement. There are convenient apps that allow you to track expenses and identify unauthorized purchases quickly.
Solution: Get a copy of your credit file from each of the three bureaus. You are entitled to a free copy every 12 months from each of the bureaus (Experian, Equifax and Trans Union). Credit scores are not free with the report but are widely available from credit card issuers with whom you do business.
- Are you aware of your debt to income ratio? Your debt to income ratio evaluates how much debt you have, compared to your income. This ratio provides a glimpse of your overall financial health and can be used to determine if you need help with your debt payments. Your mortgage should be no more than 30% of your total household income. Other debts such as credit cards, should not be more than 20%. This balance will leave approximately half of your income for essentials such as gas, food, insurance and other daily costs of living. Lender’s like to see a ratio no higher than 43% for total debt payments, when it comes to loan qualifications.
Solution: To determine your debt to income write down all debts in one column and all income in another. Then divide the two numbers to get your ratio. If the ratio is higher than it should be to live comfortably, following a stricter budget until it is in line can accomplish your goal. Finding ways to decrease expenses will also help you get debt payments down faster. If you are struggling with minimum payments, it may be time to get professional assistance for your debt before late payments become the new norm.
- Is your total debt higher or lower than it was last year? Reducing debt can be a slow and painful process. Often it is difficult to determine whether your debt has decreased unless you are tracking your progress. Successful debt reduction must be measured. Knowing where you’re starting will help you build a plan for success. When debt is rising, this can be an indicator that a debt crisis is on the horizon, even if payments are made with ease today.
Solution: Review bills from 12 months ago and today to get a picture of where your debt balances are headed. Online statements are an easy way to gather this information. Most banks provide data for three to five years and you can get copies and print them out from your online account.
- Did your net worth grow or shrink this past year? Net worth calculations look at debt and assets to determine your financial strength. Including debts in one column and assets in another, and adding everything up. This will give you a quick glance at where you are financially. Assets include savings accounts, emergency funds, home value, and retirement accounts. This will help you understand how your assets are growing and give you a look at whether you are on track for retirement or not. You are able to identify growth in your home’s value and increases in investment assets over the last 12 months.
Taking inventory each year gives you the starting point for financial growth. It will help you identify top priorities and establish effective solutions, giving you more control over your finances. If you are still struggling and need help managing your debt load, contact a specialist at Timberline Financial today at (855) 250-8329 or visit our website at www.TimberlineFinancial.com.