Learning how to responsibly handle personal finance often comes from observing others – both examples of good and bad money management. One example that should be ignored is demonstrated in the daily news – Uncle Sam. The U.S. government continues to live on the edge of default while owing trillions of dollars of debt amidst a stream of never-ending requests for more resources to pay the bills… demonstrating exactly what you shouldn’t do. How Washington handles the largest economy in the world is like an exaggerated picture of what will happen if you live beyond your means and borrow more than you can repay.
Unlike the hundreds of government agencies and programs demanding a piece of the national budget, you have sole and total control over whether you are secure or end up in a pit of despair over your finances. If you’re finding it necessary to prioritize every little expense so that the bills are paid, you may be headed for trouble. Now is the time to begin stabilizing your financial situation. Begin with a plan of action, a personal audit to access where you stand and continued oversight to ensure success into the future.
Performing a Personal Audit
It’s good to dream about the future, but if your goals are unrealistic for your current situation it’ll be an exercise in futility. This is why an audit, a fancy way of describing a thorough in depth review of your financial affairs, is so important. Performing one every few years will help you see changes that may have happened due to economic fluctuations either globally or personally such as an improved or depressed employment situation or changes in lifestyle.
A personal audit will help you see where you’re at risk and areas you’re doing well. The information you glean from an audit can help you determine just the right adjustments you need to make to keep your finances in order. Stand back and take an honest look at the following aspects of household finance:
Annual/Monthly Budget – Assessing your budget is an integral part of your personal financial audit. A realistic plan for how you spend your household income needs to be in place for you to avoid getting into debt. You have a limited amount of money to allocate for a specific number of categories – spend it wisely. The hard part is being disciplined enough to stick with it, but the benefit of security and comfort are immeasurable.
Insurance Policies – Are they up-to-date and sufficient for your needs? Will your home or auto be fully covered after a catastrophic event? Are you taking advantage of employee sponsored health savings accounts? Review how well you are covered for emergencies and who you’ve designated as beneficiaries. If you’re not sure, contact your employer and/or insurance agent for answers.
Savings and Investments – Are you making paying yourself first a priority? Do you have access savings to draw upon in case of an emergency? Are you taking advantage of employer investment opportunities? Are you using a variety of options? Do you regularly consult an advisor to make sure you’re getting the most from your investments?
Credit Accounts – What is the state of your credit accounts and loans? Are you using more than 30% of your available credit limit? Are you struggling to pay the minimum each month? Or are you managing them well enough to be able to pay off the balance each month?
Taxes – Are you paying enough each month not to owe Uncle Sam at the end of the year? Are property taxes up-to-date?
Disaster Preparations – This is an area that is easy to overlook. Do you have an up-to-date will designating an executor? Are you in a financial position to prepay funeral expenses for you and/or your loved ones? Do you have multiple copies of all your important documents kept in a safe place outside your home, such as a safe deposit box or in a safe in a family member’s home?
Establishing a Personal Debt Ceiling
Just as the federal government set a debt ceiling a few years back, every person needs to draw a line in the sand regarding the amount of debt they will not exceed to ensure financial integrity. While it’s an arbitrary number, it’s a key to keeping debt under control while leaving enough extra to put some away for a rainy day. You can use a percentage of your household income or a specific dollar amount as your personal debt ceiling. It’s not a static number but one that will fluctuate depending on your situation and as income rises or falls.
One goal that is always worthy of your effort is to set a time frame for settling all debt. This may take five years or longer, but an increased sense of control and an improved credit score is incentive to drawing up a plan and seeing it through to the end. Adjust your spending habits so you have disposable income that can be used to boost your investment portfolio whenever possible and breathe a little easier about your future.
Don’t make the mistake of expecting things to get better down the road without putting in effort. If you continue to deny the need to make adjustments, accomplishing your goals will always remain just a dream. Like Dr. Phil so aptly put it, “Continuing to do what you’re doing, ask yourself “how’s that working for me?” A personal audit is a way to recognize risk so you can take corrective action that will provide more opportunities for a less stressful and more enjoyable life.
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Noreen Ruth is a contributor to www.wowcreditcards.com along with a variety of financial-related websites. She specializes in credit/debt-related issues and has provided numerous credit education articles geared towards consumers about the latest rules and regulations, as well as ways to build, improve and maintain good credit.