Finances impact almost every area of our lives. Once the dark cloud of financial distress takes up residence in your life, it's very hard to carry on as though nothing is wrong. You're distracted by your financial situation, and you may dread answering the phone, fearing it will be a collector on the other end. Since it's hard to stop worrying, you may not sleep well, and could develop serious medical issues from the stress associated with your financial problems. Financial concerns frequently take a terrific toll on your marriage, as court records have consistently shown that money troubles are a contributing factor to divorce.
By now I hope I've convinced you that becoming financially literate is a worthwhile goal. It may seem like an insurmountable goal, but financial stability is not rocket science. It's a series of small, smart steps repeated over time.
To find that solid financial ground you're looking for, let's begin by constructing our foundation on the five building blocks to financial success:
- Review your credit report and score. In spite of it being free, the National Foundation for Credit Counseling's (NFCC) Financial Literacy Survey revealed that nearly two-thirds of adults, roughly 148 million people, haven't ordered a copy of their credit report in the past year. Nearly one-third don't know their credit score. This is an easy fix. First, go to www.annualcreditreport.com and order your credit report. The law allows you to obtain one free credit report every 12 months from each of the three bureaus. If you anticipate making a major purchase, order all three at once. Alternatively, you can stagger your request by ordering one report from a different bureau every four months. This allows you to keep an eye on activity and can guard against identity theft. Since your credit score is based on the content of your credit report, you'll want to review the report for accuracy, disputing any errors.
- Next, order your credit score. You'll have to pay for this, but it could be the best money you've ever spent. I suggest ordering your credit score from www.MyFICO.com. FICO is the creator of the credit scoring model, and is the score most widely used by lenders. The range for FICO scores is 300-850. Your goal is to have a high score, mid-700s would be great, as a high score equals a low interest rate on credit cards and loans. When you obtain your score, you should be given concrete steps on how to improve it. Utilize those tips to raise your score, and you'll reap the benefits down the road.
- Track your spending. An NFCC survey revealed that m,ore than half of all adults admit to not keeping close track of their spending. Don't be one of them. Everyone in the household who spends money should write down every cent they spend for 30 days. At the end of that period, review the findings. IIt's at this point that you can identify any leaks and move the money around to reflect how you truly want to spend it.
- Create a budget. Contrary to popular opinion, "budget" is not a four-letter word. A budget is simply a tool that puts you in charge of your money. The NFCC has a sample budget worksheet at http://www.nfcc.org/FinancialEducation/monthlyincome.cfm that you can use to get started. If those categories aren't right for your lifestyle, personalize it until it becomes a good fit for your family. One key to success is to create a budget that you can actually live with. Don't be too strict, or you're sure to fail. Tip: cutting back is always more effective than cutting out. Once you've assigned the specific dollar amounts to each category, continue to track your spending. At the end of the month, see how close you came to meeting your goals. Don't become discouraged. Before you know it, you'll feel comfortable with your new way of spending, and with the realization that you're finally in charge of your finances.
- Pay in the proper order. Now that you have a better understanding of your financial situation, you may have discovered that there's not enough money to satisfy all of your obligations. It's critical that you use your money properly. Pay your living expenses first, followed by any car payments, and then the credit cards. Keeping a roof over your head, food on the table, gas in the car and the utilities current will ensure that your home life is stable. Insurance premiums, medial needs and child care are other priority expenses that need to be satisfied each month. Last are the credit card payments. Your goal, of course, is to pay everyone, but if your creditor is happy, and your electricity has been turned off, you've paid backwards. If you find yourself in this situation, you will need to seriously pursue ways to increase income. Taking on a part-time job may not sound ideal, but the burden of working two jobs is often less than the burden of overwhelming debt.
- Have adequate savings. Saving money is often the last thing people want to consider, particularly if money is tight. But, you should do yourself a favor and establish a rainy-day fund. Thirty percent of the respondents in the NFCC survey revealed that they have no savings at all. These people are on a very slippery slope, as it's not a matter of if the emergency will occur, but when. Start by putting 10 percent of each paycheck into your emergency account and don't pull it out for anything other than a true emergency. At the end of a year, you should have a little more than one-month's income stashed away, enough to sustain you through most minor emergencies.
Once your emergency account is well-funded, start thinking about the unthinkable -- how you would meet your debt obligations if you lost your job. Experts recommend having six to eight months income saved for this kind of event. That is admittedly a very large amount of money, but no one has ever regretted having it. As a matter of fact, in my 24 years in this industry, I've never heard anyone say that they saved too much money.
Now you not only know why becoming financially literate is important, but you also know the steps to take to become financially stable. If you're still uncertain about how to get started, reach out to a trained and certified credit counselor associated with the NFCC. They help millions of people each year along their financial journey. You could be their next success story.
For more information about establishing good credit, visit Military.com's Credit and Debt center.