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Knowing Where Your Finances Stand

latoya — Mon, 22 Dec 2008 08:18:51 +0000

You can’t make a plan for your finances without knowing where you stand. You won’t know how much you can save, borrow, contribute to retirement, save for your kids’ education, or use to pay off your debt, if you have no clue how much you have. There are three key things that let you know where you stand financially.

1. Your Budget

If you don’t have a budget, now’s a good time to create one. A budget lets you easily compare your expenses to your income. At the end of your budget is your net income which tells you how much money you have left over after expenses or how much you’re overspending. A negative net income means you need to cut your expenses or increase your income. A positive net income means you can improve your financial standing by paying off debt or increasing your savings.

2. Your Credit Reports

Your credit reports contain information about many of your financial relationships. Creditors and lenders report your account details to credit bureaus who then put that information together in your credit report. While credit reports are mainly intended for businesses who want to approve your applications, you can check your credit report also, to get a feel for your level of debt.

3. Your Credit Score

Your credit score is a numeric value that summarizes the information in your credit report. If you have a low credit score, that means you have negative information in your credit report. A high credit score indicates positive information in your credit report. (Higher credit scores are better). Your credit score can help you determine where your credit stands – whether you’re doing things right or if you need to change your spending (and paying habits).

Using all three pieces of information, you can put together a pretty good picture of your financial standing. You can use all this informaiton to put together a plan for your money.

When broke people give you money advice…

latoya — Fri, 05 Sep 2008 03:01:44 +0000

I used to completely ignore financial advice given by people who are broke. If they have no money, what could they possibly tell me about managing money.

If you think about it, you could learn a lot from a broke person. They’ve obviously made some heavy financial mistakes. If nothing else, they can tell you where they went wrong.

I shouldn’t have bought that new car when I really couldn’t afford it
That apartment cost too much for my income
I was living above my means
I invested in something I knew nothing about
I borrowed from my 401k then I quit my job

Money mistakes are all over the place. While I may not let a broke person tell me what I should do with my money, I may listen to them tell me what I should notdo with my money. It may sound mean but, learning from someone else’s mistakes is priceless. Heck, I’ve made them to and I like to spend my time telling people where I went wrong, so they don’t do the same things.

Much of money management basics is common sense. Don’t spend more than you make. Don’t borrow more than you can afford. Keep track of where your money goes. So when you hear some bad advice, you may recognize it right away. Of course, it always pays to double check what you hear from any source to make sure you’re not getting duped.

My #1 Money Rule

latoya — Mon, 18 Aug 2008 00:32:24 +0000

One of the biggest money mistakes people make is spending more money than they have. In theory, it sounds impossible. If you only have a $100, how could you spend $200? Here’s how.

How People Spend More Than They Have

Dipping into savings or investments.
Borrowing.
Using credit.

You can spend like this for a little while, but if you keep doing it, you’ll run into big financial trouble.

When you take money from your savings, you risk having nothing to fall back on in the case of an emergency.

Anytime you borrow money – even from friends and family – or use credit, you create debt. The more you do it, the deeper in debt you become. Most people don’t realize the debt they’re creating until they’ve maxed out all their credit cards, dried up all sources of income, and drained their savings. Once you reach this point, it will be a long hard road to getting your financial life back on track.

Preventing Negative Income

Recognize the signs. Negative income is my short way of saying “spending more than you make.” The best way to stay out of debt is to avoid it altogether. If you notice that you frequently have to dip into savings, borrow money, or use a credit card to cover ordinary expenses, it is a clear sign that you are heading towards trouble. Don’t ignore the flashing red lights. The moment you realize you’re spending money you don’t have is the time to take the steps necessary to prevent further debt.
Track your spending. At this point, you need to start tracking your spending to see where money is being lost. Use cancelled checks, paid bills, credit card statements, and bank statements to see where you are spending money. Calculate your total spending for an entire month. It’s easier to see outages when you group kinds of spending together, e.g. gas, bills, food, and entertainment.
Cut back. Once you’ve tallied your total spending for a month, take a look at the categories of spending. Is there one area where you have spent more money than necessary? When you figure out where you are spending more money then you should, come up with a plan to spend less. Spending too much in gas? Find ways to drive less. For example, car pool to work, combine errands, or have your friends come to your house one Friday night instead of you going to theirs.

It’s not uncommon to get caught in the trap of spending more money than you make. The key is to realize the situation as early as possible and take the steps to correct it.

Many Financial Advisors Fake It

latoya — Wed, 19 Mar 2008 12:56:05 +0000

Financial advisors don’t know as much as they fool you into thinking they do. Many of them can’t give you any detailed information about the calculations they do on your finances. CNN Money’s mole gives advice on how to choose a financial advisor that actually knows the financial business.

When you’re interviewing advisors, venture outside the basic questions and dig into some details. Here are a couple of questions suggested by The Mole:

What’s the annual standard deviation of my portfolio?What asset classes in my portfolio have low correlations with each other?

You don’t have to know the answers to the questions, but your financial advisor should. Read “What your adviser doesn’t know might hurt you” in its entirety for more.