As July marks the halfway point in the year, it is an opportune time for individuals and families to decide want they want to accomplish financially in the second half of 2012. It’s also the perfect time to declare independence over your debt and credit issues during the Independence holiday weekend.
Plan for the rest of 2012 – This is the first big step. A financial plan is a tool which helps reduce spending and a guide for spending and saving. By developing a plan, you will have more financial freedom and ability to get through financial emergencies in 2012 and to prepare for retirement in the future.
GreenPath listed some steps that people can take control of their debt and credit and set them on the independent path to financial freedom in the second half of 2012.
Estimate Available Income – Determine your total income by taking wages, pensions, public assistance, and investments minus deductions like all taxes, social security, and health insurance premiums. The total amount of money left after subtracting deductions from your total income equals your available income. This will determine how much money you really have.
Check Your Spending – Compare recent and past spending patterns. This will remove the guesswork from financial planning. Identify your past spending patterns by reviewing cancelled checks, receipts, charge statements, and other useful records of expenses for the past two to three months.
Expense categories need to be identified as “fixed” or “flexible.” Fixed expenses occur at specific times and rarely change. Flexible expenses fluctuate from month to month and may possibly be altered to balance the plan.
Prioritize Your Debts – Debts that take first priority are the ones directly related to your ability to survive such as mortgages or other secured loans like auto loans. If you default on these kinds of loans, you can face foreclosure or repossession. If, for example, your car is repossessed, it may affect your ability to work and adversely affect your income.
GreenPath recommends prioritizing payments into three categories:
High priority (housing, child support, utilities, car loans);
Medium priority (personal secured loans, student loans, home improvement loans), and:
Low priority (loans for household goods, credit cards, doctor’s bills).
Set Financial Goals – Before you can create a plan for spending and saving, financial goals must be established. Goals reflect values and provide direction for planning. Establishing goals will help to balance needs and wants.
Both short-term and long-term goals are important. Short-term goals are things you would like in the next few weeks or next month. Long-term goals, on the other hand, require long-range planning and are not obtained for at least a year or more. Goals change continuously over a lifetime; as goals are reached, new ones should be established.
Create a Budget – A budget forces you to get your spending under control, to “live below your means”, which is exactly what you’ll need to do to start eliminating your debt. Making little adjustments to your lifestyle can add up to big savings. Be sure to give yourself a bit of breathing room in your budget for unexpected expenses.
Use Cash for New Purchases – Unless you pay off the entire balance every month, you are probably paying interest on new purchases from the date of the purchase. If you stop using your credit cards all together, you will be able to reduce your debt more quickly. Because of compounded daily interest, it is far better to use cash for the things you need and adjust your budget to accommodate those expenses than to use credit cards and then struggle to send large payments.
Review the Plan – To be successful, the plan will require periodic evaluations. Do not be surprised if in the beginning, actual expenses are quite different from estimated expenses. Your plan will become more realistic as you continue the process.
A review should be conducted and changes made every two to three months. If there is a change in your finances such as divorce, death, children beginning or finishing school, or parental care, the plan should be revised.
Involve Your Family – Discuss with those people within your household the things that are important to them. Everyone in your house has a different priority and this will dictate how they feel about money. Values influence your purchasing decisions. For example, one person may prefer to spend money on entertainment, while another would rather buy clothes. Understanding different priorities will allow you to deal effectively with conflicts.
Declare your independence over debt and look forward to a financially strong 2012!