01.  Analyzing Your Financial Situation
02.  Learning How to Budget
03.  Credit Scores
04.  Debt to Income Ratio

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Managing Personal Finances

Managing personal finances sounds very complicated. People cringe when they must look at their finances and make changes to spending habits. Take a moment and let's break down managing personal finances. What exactly does this mean to you? It may mean elimination of debt, investments, credit scores, or income. The answers will vary from person to person, however the end result is the same for every situation. That result is taking control of your situation.

Whether you are just starting out or getting ready to retire, control is the key factor in your financial situation. For instance, a newlywed couple starting a family will have different goals than an older couple thinking about retiring and relocating. You must at all times know your goals and work toward them. Your goals will change with time and you must be able to plan accordingly and adapt.

1. Analyzing Your Financial Situation

How much debt do you have? What are your investments? Unfortunately, many people do not know these answers off hand. The first step to taking control of your personal finances is to know where you stand as far as debt and investments. This may be a simple task for some people and a long grueling process for others. Considering all aspects of our everyday lives, many of us do not even read our credit card bills or open our investment statements. The most important thing you can do is to be informed, even if it is not the most pleasant feeling.

Below you will find a Sample Monthly Budget. This will allow you to do a simple accurate budget.

[ Download our printable Microsoft Word Sample Budget Worksheet ]

Monthly Expenses-Housing
1st Mortgage or Rent	$
2nd Mortgage or Equity Loan	$
Property Taxes (monthly)	$
Heat/Electricity/Water	$
Telephone (home and cell)/Internet/TV-Direct TV or cable	$
Total	$
Monthly Expenses-Insurance and Food
Auto Insurance	$
Home Insurance	$
Life Insurance	$
Health Insurance	$
Medical/Dental/Prescriptions	$
Total	$
Monthly Expenses-Other
Savings	$
Education	$
Children's Expenses (Child Support/Child Care)	$
Recreation/Vacations/Health Club/Sports	$
Books/Magazines	$
Cigarettes/Alcohol	$
Beauty (hair, nails, dry cleaning)	$
Car repairs and maintenance	$
Charity contributions	$
Gas	$
Total	$
Monthly Expenses-Debts
Credit Cards	$
Student Loans	$
Car Loans	$
Total	$
Grand Total	$

2.Learning How to Budget

There are many financial advisors out there who will say pay yourself first. I am sure most of us have heard the "tip" take 10% out of your check every month and put it aside for savings. With that said nearly all of us have probably laughed and thought if I could do that I would not be asking for financial advice. As a financial counselor and a struggling American like you, I refuse to give that advice to any of my clients.

Truth is it is just not possible for several people. However, there are ways to save. Throughout the years, I personally have tried to counsel people on ways to save money in numerous different ways. I have found one foolproof way that will work for any situation. It is referred to as the envelope system.

The way the envelope system works is very simple and an extremely cheap way to start learning how to budget. Below I have listed the steps and I urge every one of you to try it for one month and reap the benefits.

1. Buy a pack of white envelopes

2. Label them with all fixed expenses, such as mortgage/rent, utilities, etc.

3. Take three envelopes and label one with groceries, the second
    with miscellaneous, and the third with savings.

Now obviously your fixed expenses will not change drastically on a monthly basis, therefore those envelopes will remain relatively the same every month. You should have a groceries envelope. For argument sake let's assume you normally spend $100 weekly at the grocery store. What you are going to do is take that $100 out of the envelope and go grocery shopping with only that money on you. You will leave extra money and credit cards at home. Let me ask you a question, and think about this for a moment. What is going to happen at the store? I will guarantee you that you will under spend. You are probably wondering how I am so sure of this. Here is the reasoning behind it if you go to the store with only a certain amount of funds you will not be tempted to buy stuff that is not a necessity. The last thing you want to happen is to get to the checkout and the cashier say your total is $103. You are going to unconsciously have that in the back of your mind the whole time you are shopping.

Let's say that your total bill was $98. You have $2 left over. You are going to take that $2 and put it in the savings envelope. The next time you go shopping you should only bring $98 with you. If you continue to do this for one month you will be amazed at the results. The same goes for the miscellaneous envelope. You will notice that you do not go out for dinner as much or stop for that coffee or soda on the way to work. Instead of paying $2 at Starbucks every morning you learn to bring coffee from home. Americans are taught from a young age to pay for convenience. All of us have been victims of this one time or another. Instead of making the kids breakfast in the morning it is so much easier to just go through a drive thru. These are convenience that we are accustomed to, however the wallet takes a huge hit.

3.Credit Scores

As I stated earlier, credit scores will play a huge role in your financial future. People with higher credit scores will be given more credit with better interest rates and terms. Too many of us assume that if our bills are paid on time our credit score will be good. This is a myth. Credit scores are made up of many different factors. Although payment history does have a big impact on your credit, there is much more that goes into obtaining a good credit score.

Just as important as paying bills on time is the amount of debt that you owe. If you currently are almost maxed out on your credit limit than keep in mind that your score will be affected poorly from this. The difficulty with this is that it is beyond your control too often. Many creditors are lowering limits on cardholders for no reason at all. The best thing to do is keep low balances, therefore you do not need to worry if your credit limits get reduced.

Another part of your credit score is inquiries. Last time you went to a department store were you offered a percentage of your bill to apply for a card? The answer probably is yes. The question is how many of you took advantage of it? If you did, your credit score was negatively affected. Every time you give someone permission to pull your credit it lowers your score. In the future do not give anyone access to your credit unless the card is necessary and the savings is substantial. For your own knowledge you are the only person who can pull your credit without it affecting your score.

2.Debt to Income Ratio

After taking advantage of the envelope system you will be able to see on a first hand basis that saving money is not out of your reach. You will be accustomed to budgeting and will no longer need to use the envelopes.

The next step you want to take is to figure out your debt to income ratio. Lenders use this to determine the risk you are before approving you for a loan. It sounds complex, however with the chart below you can be one step ahead of the creditors. We are all well aware that credit scores play a huge role in determining the terms given when approved for credit. Lenders, especially mortgage companies, will look at your debt to income ratio to determine the risk you are to that bank. Generally speaking a lender prefers to see that the borrower has about 30% more money than needed to pay bills. Taking a few minutes to calculate your debt to income ratio will give you more insight as to what terms you will be given from the lender.

Calculate your own Debt to Income Ratio

Step 1 - Calculate your monthly take-home pay.
Step 2 - Calculate your total monthly debt payments.
Step 3 - Divide your total monthly debt payments by your total monthly take home pay.

[ Download printable Microsoft Word Version ]

Calculate your monthly take home pay:

Monthly Income	$
Tax Refunds	$
Dividends or interest	$
Other income subsidies	$
Bonuses, commissions, or tips	$
Full or part-time employment income	$
Child support or alimony received	$
Pension or other retirement income	$
Welfare or other government entitlement programs	$
Total	$

Calculate your total monthly debt payments:

Monthly Debt	$
Car payment(s)	$
Loan payment(s) (furniture, appliances, etc.)	$
Financial institution loan(s)	$
Student loan payment(s)	$
Other loans/credit accounts	$
Credit card payments	$
Payment for past medical care	$
Total	$

Divide total income by total debt	$
Debt to income ratio	%

4. Debt to Income Ratio Chart

Debt to Income Ratio	Financial Situation
10% or less	Doing excellent.
11% to 20%	Most people can carry this debt without any problems
21% to 35%	You are not in the hole yet. You need to start taking control and paying what you can.
36% to 50%	You need to take action right now. Try to steer clear of getting in any more debt or you may need professional help.
50% or more	You need to look into getting professional help

Got a question? Then contact our Education Team on 561-883-2398 Ex.310 United conducts regular seminars on financial education, including "How to Budget", come along and join us - to reserve your seat contact our Education Team on 561-883-2398 Ex.310

Newsletter 03
Rev.1
March, 2009