By Andrew Housser
Spring is officially here, and -- maybe not coincidentally -- April marks Financial Literacy Month. Combine those two landmarks with the flurry of financial record-keeping that accompanies income tax day in the United States (April 17 this year), and it is an ideal occasion to "spring clean" your finances. Complete these eight steps to polish up a money management system to carry you through the coming year.
1. Polish up your spending plan.
First, review your short- and long-term spending goals, either alone or with your partner or family as applicable. Then review your income and spending plan (budget). Be sure your expenses are in line with your income. Your spending should allow you to cover all expenses with regular income -- not with borrowing -- and let you accumulate some savings or pay off debt, as needed.
2. Control credit card spending.
Spring is a great time to make a fresh start, and few things are as important in the personal finance world than reducing credit card debt. The first step is to stop adding to it. Instead of turning to plastic, withdraw cash for the week or month, or use a checkbook or debit card to make purchases. Being more conscious of spending will help rein in impulse purchases and reduce overall spending. If you find credit cards irresistible, put them away in a safe place and delete card numbers from online shopping accounts. Some people find it helpful to freeze cards in a bowl of water (the time it takes to thaw out may deter impulse spending). Think twice before closing long-standing accounts with a positive payment history, as they positively impact credit scores.
3. Clean up your credit.
Once a year, request a free "tri-merge" (all three major reporting bureaus) credit report from www.annualcreditreport.com. If you find errors or misrepresentations, follow the directions on the website to ask each agency to correct or remove the mistakes. If the report contains negative information that is factually accurate, send a letter explaining the cause of the derogatory mark (e.g., divorce or medical hardship made it impossible to pay your credit card payments two years ago). Ask the reporting agency to append the explanatory letter to your profile. This process can improve your future access to credit.
4. Pay down debt -- especially credit card debt.
If you cannot pay all of your debts down in a short period of time, determine a fixed monthly amount you can pay toward your debt. This amount should be more than the combined minimum payments on all of your cards. Then choose either the avalanche or snowball method. With the avalanche method, make minimum payments on credit cards with the lowest interest rates, and put all additional available funds to the card with the highest interest rate. Once that is paid off, put excess cash to the card with the second-highest rate, and so on until you are debt-free.
With the snowball method, pay the minimum on all debts. Apply any remaining funds from your overall allocated amount toward paying off the debt with the smallest balance. After you pay off that debt, continue paying the same monthly amount you started with. Follow the same strategy: Pay the minimum on all debts, but allocate all remaining funds toward your second-smallest debt. Working on debt elimination this way gives some people the most immediate satisfaction.
5. Commit to savings.
Start considering savings a "bill" that must be paid, even if it is as little as $1 per day. Often, people find saving easier when they take advantage of direct deposit or automatic transfer to a savings account. Three types of savings are essential. First is an emergency fund. Ultimately, aim to save enough to cover six to nine months of basic living expenses. Second, plan for short-term savings to cover anticipated expenses, such as holiday gifts, car repairs and maintenance, or an insurance premium. Set something aside from each paycheck for these expenses, and you'll be prepared when the bill comes due. Third, contribute to your retirement savings, whether through an employer or through an individual savings vehicle.
6. Find extra money.
This might sound easier said than done -- but it is well worth an annual scouring of your household bills to see where you can free up cash. Look at your list of expenses from item No. 1 on this list. Then methodically examine each item to see if you can slash the cost. Can you borrow videos from the library or watch network TV instead of costly cable? Have you slacked off on a resolution to brown-bag lunch instead of eating out? Do you need two cars, or can you get to work by bike, foot or carpool? Can you find a more affordable cell phone plan? Some people even embark on a "spending fast," cutting out all spending except for essentials for a period of time. These changes can help get you out of debt or build an emergency fund.
7. Check your insurance coverage.
Review your insurance coverage each year. Check your coverage for health insurance, homeowner's or renter's insurance, car insurance, disability insurance, life insurance and long-term care insurance, as appropriate. If it's been a while, consider reviewing rates with a few insurers or getting online quotes to compare premiums. Generally, high-deductible policies with low rates protect from catastrophic events while keeping the monthly burden low.
8. Go paperless.
Paperless billing is good for the environment. It also eliminates the possibility of stolen mail and misplaced paperwork. Contact your financial institutions and set up electronic billing. Enter due dates in your calendar (so you do not forget to pay on time) or set accounts to automatically make a payment each month so you never miss a payment. Late fees and collection notices will become a thing of the past. Just make certain you will have funds in your account to make the payments.
Some of these steps can be accomplished quickly, while others demand some time and dedication. All have something in common, however: When you achieve them, you will be one step closer to healthy finances all year long.