Fix Your Financial Problems and Get Back on the Right Track
A monthly budget and a plan can be mighty tools
People face a wide variety of financial problems. The trouble might begin because you have a hard time or a distaste for budgeting, then it blooms from there into additional issues that can have serious implications.
The key might be as simple as taking the time to identify the source of the problem. You can begin to fix it from there and take control of your finances.
You might be having budgeting problems if you're consistently running out of money before you run out of month, and you find yourself relying on credit cards to make ends meet. You look at what you earn and wonder why it doesn't seem to be enough to cover all your bills even though you earn a good salary.
You might even have a written budget that you try to follow each month, but it never seems to work. This is a prime indicator that you have a budgeting problem.
Create a Budget
Start by creating a budget if you don't yet have one. The easiest way to do this is to look at what you spent in each category last month and adjust from there. Common budget categories include:
- Housing (rent or mortgage)
- Saving (emergency fund, sinking fund, and retirement)
- Insurance (auto, health, and life)
- Medical care
- Transportation (car payment and/or commuting expenses)
- Debt service (credit cards, personal loans, home equity loans, and other credit accounts - see our payment calculator below if you're considering one)
- Health care
- Discretionary spending (entertainment, dining out, and "extras")
You might have others that don't appear here, such as child care. Add them in.
Some of these expenses are fixed. They remain the same month after month. Others might fluctuate beyond your control—utility costs can vary by season, or maybe your childcare provider has upped its rates.
Still others, like discretionary spending and groceries, are within your control. You can spend less on these things if you have to.
Track Your Spending and Adjust as Necessary
Add up all the categories you've determined in your budget. You have some tweaking to do if the total is more than your monthly take-home pay. You'll have to cut somewhere, typically from those expenses that you have control over. You do not want to put less toward your savings or debt service if at all possible.
The key to making your budget work is realizing that it's flexible. You can take money from one category and use it in another category if you overspend. For example, you might splurge on concert tickets, but then you'll have to adjust your grocery budget to cover the extra you spent in your discretionary/entertainment category.
Budget meetings are essential if you're married and want to succeed financially. You and your spouse should communicate on a regular basis about the budget and who's spending what and where.
Again, budgeting software can come in handy here because you can update it when you're shopping, and it can prevent you from overspending when you're on separate errands.
Spending Issues: Stick to a List & Play the Waiting Game
Most people have an area in which they consistently overspend. You can address these "leaks" in your budget in a few ways.
- Limit when you go "pleasure" shopping, and don't take a credit card with you.
- Create a menu plan, a grocery list, and make meals ahead if you tend to spend too much money eating out. Stick to your list no matter what's on sale. If you didn't need steak or five bottles of cola when you were making your list, odds are that it hasn't become a must-buy just a few hours later.
- Time is your friend when it comes to not spending needlessly. You might really, really want that classic bottle of bourbon today. Wait a month to buy it. You're not denying yourself. You're procrastinating. That little gift to yourself can be something like a reward if you find that you've really stuck to your budget at month's end.
You might also switch to the envelope budgeting system. This is basically a cash-only budget—or part of your budget—where you pay cash for your "controllable" categories like groceries and discretionary spending. Put the money you budgeted into an envelope for each category at the beginning of the month, and stop spending in that category when the envelope is empty. You might realize that you think twice about dipping into an envelope if you consider that doing so now might empty it out before the month is up.
If You Have Debt Problems
Too much debt can be crippling. Address this issue as quickly as possible because you won't be able to get ahead financially if you're carrying a large amount of debt.
Consider creating a debt payment plan. List your debts in order of the smallest balance to the largest, or the highest interest rate to the lowest interest rate. This is the order in which you're going to pay them off.
Take the money you were paying toward the first and add it to the payments you're making on the second debt after you've paid the first one-off. Continue rolling the money over until you've paid off everything.
But avoid closing credit cards as you pay them off because this can lower your credit score. Part of your score depends on how long you've been borrowing, so closing a card that you've hard for a while can cost you some points. You should always leave at least your oldest card open, ideally with a very minimal or zero balance.
Debts in Collections
You can often settle debts that have gone to collections by paying less than you actually owe. The creditor will "forgive" or write off the balance.
It's all about negotiation. Call the creditor, start with a low amount, and offer a one-time payment. Maybe you owe $3,000. Offer to remit $1,500 right now if possible if the creditor will "erase" that remaining $1,500 balance. The credit might counter with $2,000. Keep trying.
Do not give the creditor access to your checking account over the phone. Send a cashier’s check by certified mail once you've received a letter confirming your deal, and keep a copy of that letter in case there's a question later on.
You might be responsible for paying income taxes on any debt that's forgiven. You could receive IRS Form 1099-C from the creditor, and a copy is sent to the Internal Revenue Service as well, showing how much of your debt was erased. You must generally report this amount as taxable income on your tax return.
Check with a tax professional to be sure before you report this money on your tax return. You might not receive one at all because these forms generally apply to really significant forgiven debts, like mortgages.
Find Extra Money
You can begin moving forward more quickly if you can get your hands on some extra money to pay off your debts. You might consider selling items you no longer use or look in your budget for things you can cut out without feeling the pain too much.
You might want to consider cutting your cable or cellphone service back to a less expensive package. You might be surprised at just how much you can pay off if you sacrifice a bit of your lifestyle for a while.
Another option is to take on a second job. In fact, you might want to try a combination of all three approaches if you're serious about conquering your debt.
Don't Add On
There's no point in working to get out of debt if you continually add onto it each month. Stop using your credit cards as much as possible. You're effectively just treading water if you make payments then turn around and charge right back up to your previous balance.
Don't Forget That Emergency Fund
Budgeting gurus came up with the concept of an emergency fund for good reason. Maybe life is moving along nicely, then the company you work for goes out of business. You're out of work through no fault of your own. Or maybe you're crossing the street when a taxi hits you. You're out of work while you recuperate, and you might have uninsured medical expenses as well.
Having some cash stashed away in an emergency fund might not save the day entirely, but life will be a lot easier than it would have been if you hadn't saved for the unexpected.
It's recommended that you have at least three months' living expenses set aside, and some experts say six months. Yes, that can be an intimidating number if your monthly nut is $3,500 or more. Start small if you must, but start. You'll get there eventually, and you might be glad you did.
Credit problems can make it difficult to land a job, rent an apartment, or buy a home. Poor or even iffy credit can affect the interest rates on your car loan and negatively affect your finances. Understand how your credit works so you can identify why your credit score is low and start to fix it.
Two common culprits are making late payments and maxing out credit cards. Paying a week or two late might not ding your score too horribly, but paying 30 days late—or even worse, 60—can deal it a serious blow.
Your credit utilization ratio is also critical to your credit score. Ideally, you'll want to keep it at less than 30%. This means that your total balances add up to no more than $3,000 if you have credit limits of $10,000.