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Building A New Financial Life

You don’t have to go through a bankruptcy to make a positive change in your relationship with money. It’s something you can do the minute you wake up tomorrow-resolve to make a fresh start in your financial life.

The first thing you should do particularly if you’ve never done it before  is create a household and personal budget.

WHAT’S A BUDGET?

A budget is a written document that lays out your necessities, goals, and wishes, and details how much you spend on them based on the money you have coming in. As months go by, you see how far apart your income and spending figures are, and you tweak them into alignment. That’s called meeting a budget.

It’s a simple idea, so why do so few people do it?

Because it involves something very few people really like to do, and that’s face facts.

It doesn’t matter whether you create a budget on paper, on the computer, or even on the Internet, as long as you attempt to create one. You might choose to tailor it more precisely to your individual spending and income needs, but most budgets use similar headings and categories.

A budget isn’t something that’s automatically set in an afternoon’s work, though it would be nice if that were the case. You have to build up several months of behavior on paper first to get an idea where you can cut and add.

We should note that a budget shouldn’t force you to cut out all the fun in your life, but it should get you thinking about what is critically important. You might need to forego a little fun to get your finances in better shape in the short-term, but you’ll learn that fun is something you can also save and plan for. Once you get in the habit of setting aside money for gratification, there’s less worry and uncertainty attached to it.

Budgeting

The Annual Credit Checkup

As you start your new financial life, it makes sense not only to check your credit report and credit score, but also to understand the proper things to do to maintain the best numbers possible. Some new resolutions for your credit rating:

Get all three credit reports and scores at the same time. You’ll have to spend around $5 to access your credit score, but you can get your credit reports for free at a Web site called www.annualcreditrcport.com. This particular site accesses all three credit bureaus, Experian (www.experian.com), Equifax (www.equifax.com), and TransUnion (www.transunion.com). Stagger your requests (you’ll spot trouble more easily if you check each credit report at a different time each year). You can respond quickly to inaccuracies in writing either by mail or on line, and make sure you do this at the same time every year.

Resolve to pay on time. Yes, it’s obvious, but with such busy schedules, many people fail to remember the day to put the checks in the mail so they’ll clear on time. Do any of the following. First, get a calendar, and when bills come in, mark payment days five to seven days ahead of due dates so the U.S. Mail gets your payment in on time. Second, check out the electronic bill payment service at your bank, and program in payment reminders so you never forget to push that button. You can also use your creditor’s electronic payment option, but pay a few days ahead at the start so. You can see how quickly your payments are recorded (some electronic payment systems still delay recording payment by a day or two even if the debtor pays on the due date).

Get current. If you have missed payments on an account, do whatever it takes to get current and then never let yourself fall behind again. According to www.myfico.com, the longer you pay bills on time, the better your credit score. Placing your bill payment schedule on a calendar will help.

Understand the problems with your credit. It takes seven years to remove a collection account from your credit record, even if you’ve paid it off. Write down the exact month when that mark on your report will be removed, and make sure it happens.

Get rid of balances in sequence. Come up with a plan to pay off credit card balances in a sensible order. There’s a temptation to move around outstanding balances if you get a good offer. Sometimes it still makes legitimate sense to do this if it cuts your borrowing cost, but make sure you don’t shift balances too often-focus on paying balances off, the highest-rate ones first.

Limit your credit inquiries. You might get sexy credit card offers and refinancing notices at a rate of five a week, 52 weeks a year, but that doesn’t mean you need to check all of them out. In fact, an excess number of credit inquiries can lower your credit score. When you do investigate credit, do so within a focused period of time, optimally two weeks, and then stop. Lenders watch very closely how many credit card and loan opportunities you check, even if you don’t end up taking the offer. They see you investigating credit opportunities as a first step to you getting in trouble.

If you do borrow, ask lenders which bureau they use. If you are making an effort to keep your credit in check and your reports accurate, this won’t make a lot of difference, but it always pays to ask a potential lender-particularly a mortgage lender-if there is one brand of credit report they favor over others. It’s important because you may have a significantly higher or lower score on one report compared to the next one.

Cut up the card-don’t close the account. Closing accounts even those that have had zero balances for years-can be a lousy idea. Lenders want to see a long record of credit management, and long time accounts that you haven’t touched in years may actually help your score because it shows you have some restraint.

Get some perspective before you make these moves. Borrowing may seem like a process for the masses, but in reality, borrowing effectively means understanding your specific needs and circumstances. Someone like a CERTIFIED FINANCIAL PLANNER, professional can help you look at your credit issues from all appropriate angles.

Looking Ahead

In this article, you’ve identified the basic building blocks of getting a handle on your finances-identifying sources of income, expenses, and most importantly, debt. The next section of this article will explain how to set up your financial strategy for the long term.

How a Financial Planner Can Help You Organize Your Financial Life

Roy Diliberco, CFP®

Roy Diliberco, CFP®

Roy Diliberto, a CERTIFIED FINANCIAL PLANNER” professional from Bonita Springs, Florida, realizes that financial organization doesn’t mean sorting paper and receipts.

“That’s not even the first step;” he stresses. “The first step in financial organization is figuring out what people really want to accomplish in their lives, what’s really important. Then the next step is to build a structure that will deliver those goals.”

Not that paperwork isn’t important. Diliberto does try to get clients to do a better job of record-keeping and evaluating goals. “Most people who are consulting a planner for the first time have never attempted to compute the basis on their mutual funds or stocks, and that’s necessary. How many people think at midyear about harvesting tax losses? A planner can keep you up to date and help you track complicated issues.”

There’s another good reason to keep your financial life up to date with a planner. If you die, suffer a health emergency that leaves you incapacitated or a natural disaster that wipes out your home and records, a planner would have an updated copy of your financial details on a CD-ROM. A good planner makes sure that he or she has all the information necessary to play air traffic controller-they have all your contacts- on file to make sure they know they have necessary information, including the executor of your will.

“Keep in mind that since 9/11 we all have a greater appreciation for offsite maintenance of records;” explains Diliberto. “Your planner can be an important part of that.”

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