Examining your Finances
[How's Your Credit?] [Fixing Your Credit]
[A Warning About Credit Cards] [Why Save?]
Creating A Budget
Whether you choose to live in your own home, in an apartment, or with friends or family, you need to have a budget to pay your expenses and save for what you may want or need in the future.
To begin creating a budget, gather all your bills, check stubs, receipts - anything that shows where you get your money and what you spend it on. Gather paychecks, social security or disability benefits, public assistance, heat, water and phone bills, rent, credit card statements, car payments, grocery store receipts - everything!
Next, use the worksheet in the Appendix to write down all of your monthly income and expenses and total them. Now, subtract your total expenses from your total income. This will tell you how much money you have left every month to save or spend.
If you have extra money, you may decide to use the money for something you want or need, or you may decide you want to save some of this money for the future. Only you can decide what's important to you.
If your total expenses in your budget are greater than your total income, you will need to lower your monthly expenses or earn more income. Try these tips to lower your expenses:
- Ask your utility company to put you on a monthly budget. This will help your budget because you will be paying the same amount every month.
- Use only one credit card. If you have more than one credit card, use the one with the lowest interest rate to pay off the others. Don't forget to cancel the cards you pay off and cut them up so you don't use them again!
- Use layaways instead of credit cards. Layaways will add an item to your monthly expenses but is cheaper than using a credit card.
- Make a shopping list for groceries and household items, and then stick to it when you get to the store. Only buy items you need!
- Only carry as much cash as you really need. If you have extra money with you, you might be tempted to spend it instead of saving it for something more important in the future.
Credit and housing counselors can help you figure out how to budget your money better and how to save for what you want. A list of consumer credit counseling services and housing counselors can be found in the Resource Section.
What Can You Afford?
No matter where you choose to live, you will have expenses. Some will need to be paid monthly, some annually, and others at different times during the year. You may find after completing the income and expense worksheets in the Resource Section that you will need to rent or save for a while to be able to afford to buy or build your own home.
But if homeownership is your goal, nothing will help like a good plan. Housing counselors are available to work with you to decide what steps you need to take to own your own home. A list of housing counselors can be found in the Resource Section.
As a rule, the cost of your house should be about two and a half times your annual gross income. The rule can vary based on interest rates, the amount of your current debt, and the type of loan program you apply for, but it's a good rule to use to get started.
Remember, the cost of buying a home is more than the actual cost of the house. Other costs can include:
- Home inspections - inspections are conducted throughout the buying process and include building, termite and radon inspections
- Down payment - your contribution to secure the loan, generally 5% of the price of the house
- Closing costs - credit report fees, appraisal fees, application processing fees, transfer taxes, lawyers, etc.
- Escrow - special account that sets aside money for taxes and insurance
- Reserves - an amount set aside that is equal to your mortgage and expenses for two months
- Moving costs - start-up fees for utilities, painting, cleaning, furniture, decorating, appliances, moving companies, etc.
Programs are available to qualified individuals to help with down payment and closing costs, especially if this is your first home. A housing counselor can help you identify these programs.
Meeting with a lender can also help you understand how much you can afford to spend on a home. Most lenders will prequalify you for a given amount by looking at your savings, credit history and annual income. Prequalifying does not guarantee that you will get a loan for this amount but it will give you an idea of what housing price range you should be looking at.
Prequalifying will also give you an idea of what your monthly mortgage payment should be. Once you find that payment amount, you should redo your monthly expenses worksheet to see how this new expense affects your life.
How's Your Credit?
At some point in their life, most people will decide they want or need something that costs more than the money they have on hand.
If the item you want is very expensive, such as buying a house, you may need to work with a bank or other lender to get a loan for the amount you need. But before the bank will lend you the money, they want to make sure you will be able to pay them back.
One way banks decide if you can pay this back is by looking at your credit history. Your credit history will show if you are currently paying your debts on time and how you have handled your bills for the past seven years. Debt is the amount of money you owe on loans, credit cards or to utility companies for past bills.
You can find out what your credit history is by getting copies of the credit report from a credit reporting bureau. For a small fee, you can get the report by calling one of the credit bureaus below:
- Experian 888-397-3742
- Trans Union 800-916-8800
- Equifax 800-685-1111
Fixing Your Credit
Your credit history does not have to be perfect to get a loan and, in many cases, bad credit can be fixed.
Bad credit is usually caused by failure to pay your bills on time or not paying your bills at all. Bad credit can also be caused by judgments against you, bankruptcies, or credit cards at their limit.
If your credit report shows that you have had bad credit in the past, you can take steps to improve your credit rating.
- Call your creditors or collection agency and establish a bill payment plan
- Write letters explaining why you missed payments or payments were late and ask that these letters be placed in your file
- Take a look at your budget to see where you can save money - take your lunch to work instead of eating out or give up cable TV until your debts are paid
- Get a copy of your credit report and look for old information - after seven years, you can request that damaging information be removed from your credit report.
You may also want to consider working with a credit counselor to get back on the good credit track. Often, solutions suggested by creditors, such as discounted payoffs and debt- management plans, can still show up on your credit report and affect your credit rating.
Credit counselors can help you create a plan to improve your credit and get out of debt. A list of consumer credit counseling services can be found in the Resource Section.
If you have no credit history, you will need to establish credit before many banks will give you a loan. Starting a savings account and making regular monthly deposits are good ways to establish credit.
You can also establish a good credit history by keeping your rent receipts, phone bills or utility bills that show you make regular monthly payments on time, or by having a credit card that is paid in full. Having someone you know co-sign a loan with you can also help you establish a good credit history, as long as you make full payments on time.
A Warning About Credit Cards
Credit cards can be helpful if used properly but are sometimes hard for people to manage. The cards are often too easy to get and too hard to repay.
But, having a credit card that you pay in full each month is a good way to establish credit. So, if you decide you want a credit card, follow a few simple rules:
- Find out if there is an annual fee. Some credit card companies charge you $40, $60, $100 or more each year even if you never use your credit card.
- Make sure you know what the interest rate is going to be. Credit card companies will often offer 0 percent interest on new cards but may increase this to 20 percent or higher after six months!
- Limit yourself to just one credit card. You don't need to have separate credit cards for gasoline, department stores and other businesses. One credit card, with a low annual fee and low interest rate, is usually enough.
- Only buy on credit what you can afford to pay off every month. Remember, making minimum monthly payments only makes the credit card company rich.
- Make your monthly payments on time and try not to use your credit card to the limit.
Having a good payment record with a credit card company can help you if you need a loan but a poor payment record can be a hard problem to solve if you ever need good credit in the future.
Opening a savings account is a good way to establish credit and save the money you need to get what you want. There are many different ways to save money from piggy banks to bank accounts that pay you interest on the money you have saved.
If you are planning to own your own home or rent an apartment, you will need money for things like down payments, furniture, decorating and emergencies. By putting aside money every month in savings, you will have the money you need when the time comes.
The first rule of savings is to put your money into savings first, before you do anything else with your monthly income. You may find after completing your budget that you only have a small amount left over but it is a good idea to try to save some money every month.
Many employers offer plans that allow you to make payments to a savings account directly from your paycheck. These are called direct deposits and help you resist the temptation to spend the money on things you don't really need instead of saving for something you really want or will need in the future.
Try an experiment. Collect your pocket change at the end of each day and put it in a special place. Then, take the change every month to the bank and deposit it in your savings account. you'll be surprised at what you will have at the end of the year!