Personal Finance Advice

The last few years have featured a widespread acceptance of utilizing credit to make everyday purchases,  but now as most people tighten their belts it has become glaringly obvious that maybe our grandparents were on to something when they warned us to be careful with credit.  Many people are now needing to scramble quite a bit to cover all their monthly debt obligations, and for a good portion of these folks the main problem is the credit they enjoyed with a little too much zeal.

Even if your personal finances are stretched a little thin right now, it is still a great time to try to pay down your debt.  There is no way to know if the economy is going to get better or worse, so it’s best to be cautious and do what you can now to try to ensure that you aren’t bankrupt within a few years. 

Here are some ways to start paying down your debt:

1.  Figure out how much you actually owe.  Some people aren’t even sure exactly how much money they owe.  It can get difficult to keep track of debt, especially if there is a mortgage, equity loan, auto loan and credit cards in the mix.  This isn’t a viable excuse to completely lose track of your debt, however, and at the very least you should always know an approximate figure of how much you owe total.  When the time comes to start paying the debt down then it’s time to sift through all your statements and figure out exactly how much you owe so you know what you’re up against.  Tally up all your debt to see where you stand.

2.  Figure out what you should pay down first.  Don’t make a huge effort to pay down your primary mortgage if you have a bunch of high-interest credit card debt, and don’t try to pay down your equity loan first if you have a personal loan.  Although there are always exceptions - such as when you’re trying to pay down your mortgage to a lower level before you attempt to sell your house - it is usually best to pay down unsecured debt first.  Why? The two main reasons are this: The mortgage loans are probably tax deductible, and the interest rates are probably higher on the unsecured debt.  You decide which unsecured debt to pay down first, but once you make the decision you should put extra payments toward the debt as much as possible.

3.  Figure out how long it will take.  You’ll have a better idea of how much money you should put toward your debt to get it paid down if you use a debt calculator to figure out how long it will take.  Getting a realistic view of the effort required to pay down your debt will help you get serious about your personal financial goals.  In other words, if you have several thousands of dollars in credit card debt and you think that adding $100 a month to the debt will get you debt-free rapidly, think again. 

4.  Get serious.  Face it; it’s not a lot of fun paying off debt.  You can’t spend like you used to and it takes a while before you see any light at the end of the tunnel.  On the other hand, if you aren’t dedicated to getting the debt paid down then it’s unlikely to happen.  Figure out what you have to do to get serious about paying off your debt and then get to work.  You may be surprised at how quickly your debt starts to disappear once you get serious about the process.

With so many people looking to buy a house with so many foreclosures and short sales on the market, it’s easy to think that now is the time to hop into homeownership.  Just because houses are being offered at attractive prices, however, does not automatically mean that it is time to apply for a mortgage.  Before you buy a house - no matter how good the deal is - you need to take a hard look at your personal financial situation and consider all the additional expenses involved with owning a home.

Think beyond the monthly mortgage payment, and even beyond expenses associated with paying real estate taxes, homeowners insurance, and homeowner association fees.  Think about this: Who pays for repairs when something breaks or something goes wrong?

Financial experts usually suggest that homeowners have a savings account that they regularly contribute to in case something goes wrong with the house.  Suppose the water heater stops working, or a baseball goes through your front window and your insurance won’t cover the cost of the repair or your deductible is more than the total cost for the repair.  These are instance when you dip into the savings account that you have been putting money into faithfully in case something needs to be fixed.

What about the bigger expenses? What if your foundation cracks and you have to pay thousands of dollars to get it repaired? What if your basement floods and you have to pay for the repair costs out of your own pocket? Even the most diligently deposited savings account can be wiped out by something like this, and in many cases homeowners have to turn to credit in order to fully cover the cost of the repairs.

Owning a home is a little like walking a tightrope.  It’s exciting and there is certainly prestige associated with it, but you’re perpetually on the brink of disaster.  Not everyone is financially devastated by having to make a major repair on a home, but a sudden necessary expense on a home that costs a lot of money is enough to throw most homeowners into some form of financial peril.

This is not to say that people should not become homeowners.  Owning a home can be a great way to build wealth and for many people it’s a huge step in achieving their financial goals.  The trick is to stay realistic when buying a home and to not assume that once you buy your house you’re finished with your expenses.

So what can you do to make sure that your personal finances aren’t in danger with every potential home repair? Homeowners should regularly contribute to a savings account that is specifically set for home repairs and upkeep, just like financial experts advice.  There are a couple of other things homeowners should do to avoid financial disaster:

Don’t get overextended.  All of your personal finances are intertwined, so that means that your maxed-out credit card balance greatly affects your ability to pay for a repair needed for your home.  When you own a home you need to try to keep your personal finances in good order, otherwise you’re asking for trouble.

Don’t use up your equity.  Homeowners who gobbled up their equity with cash-out refinances and equity loans back when real estate was appreciating in value rapidly have since become owners of homes that are worth less than they owe, thanks to depreciation.  Your home is not a piggy-bank.  Keep your equity where it is and only use it if you have to. 

Always keep in mind that as a homeowner you are the one responsible if something goes wrong with the house.  If your personal finances aren’t in a state where you could handle an expensive repair without throwing your finances into chaos then don’t buy a home.

Whether you get your bank account and debt statements in the regular mail or if you receive statement notifications by e-mail, you need to open them up and take a look.  It doesn’t matter if you have zero balances on your credit cards or if you always keep up on your checking account register down to the last penny…if you don’t take the time to review your monthly statements then you’re asking for trouble with your personal finances.

Mistakes happen.  It may be a mistake that you make, or may be a mistake made by the financial institution servicing your account.  The best way to realize that there is something going on that needs you attention is to pay attention to your accounts.  You’re much less likely to bounce a check or miss a credit card payment if you are actually familiar with what is going on with your accounts.

You don’t have to toil over your accounts every month, but you do need to take the time to have a look at the statements when they arrive.  Think about all the potential scenarios that can arise from not paying attention to your accounts:

1.  You have a credit card with a zero balance for so long that you get charged an inactivity fee.  You don’t open your statement so you don’t know the fee is on there, and by the time you realize what is going on your account has the original fee plus costly late fees for not paying the original fee.

2.  Your employer deposits the wrong amount of money into your checking account on payday.  You write the same checks and pay the same bills you always do, assuming that your deposit made it into your account without any glitches.  The next thing you know there are letters in your mailbox telling you about all the overdraft fees you owe.

3.  Someone gets their hands on your credit card number and makes some fraudulent charges.  The charges are small enough to where your credit card company does not flag them as potentially fraudulent, and by the time you realize what has happened several months have passed.

You can’t just assume that everything is business as usual when it comes to your bank accounts and debt.  There are simply too many things that can happen, most of which can be potentially very expensive if you don’t catch them in time.  The key to being successful with your personal finances is to be proactive.  If you’re passive with your accounts and merely assume that everything is fine then you open yourself up to plenty of problems.

You don’t have to make a big deal out of reviewing your accounts.  Just set aside a little bit of time once a month to review them all, or better yet you can open up the statements as they arrive and just take a quick glance at them.  If you don’t discover a problem with your account until months later then your chances of getting it cleared up dwindle considerably.