Six steps to gaining financial control
Getting prepared, getting organized – Are you in control of your finances?
Are you feeling overwhelmed when it comes to your household finances? Do you feel like you’re spiraling out of control? The Assessing Your Financial Situation Chapter of The Starting Over After Foreclosure Toolkit can help you get back on track.
If you haven’t been through a foreclosure, that’s great news! That doesn’t mean the toolkit can’t help. According to the toolkit, there are six steps involved in helping you to gain valuable insight into your personal situation and to assist you in determining what your needs are to get on the right path for you.
Step 1: Organizing family records
Recordkeeping is the first key to organizing your finances. Create a system that works for you and put it in a location that is easily remembered and accessible. You should have one place for all your records and important documents; a fireproof safe may not be a bad idea. Determine who gets to keep track of the records, develop a record-keeping schedule, and then get organized.
Step 2: Develop a spending plan
Don’t worry, you can find a great worksheet in the toolkit on page 14. Although spending plans will vary based on each family’s situation they will help prevent arguments and assist in spending decisions. All members of the household need to be included in the building of the spending plan and you need to be honest about your financial situation. Including all members of the household will help in keeping everyone on track.
Step 3: Determine your net worth
Determining your net worth will help you to identify available resources and areas in which you may be able to improve you financial situation. The toolkit has a worksheet available on page 19 to assist in calculating your net worth along with some great questions to ponder on page 20. The net worth statement will be a great way for you to review your progress from time to time.
Step 4: Are you ready to take on new debt?
How do you determine if you are ready to take on new debt? Using a debt-to-income ratio is a great place to start. The formula is:
Debt-to-Income = total monthly debt obligations (divided by) Gross Monthly Income
Once you figure your debt-to-income ratio a good rule of thumb to use in determining if you are ready to take on new debt is if you your ratio is greater than 0.38 (38 percent) then you may not have enough income to take on new debt.
Step 5: Manage your spending
Sounds easy but in reality it’s not always as easy as it sounds. Remember, all family members need to control their spending. Have regular family discussions and ask questions such as: How can we reduce spending? Can we do without? How can we conserve and avoid waste? Also, don’t forget to revisit your spending plan especially if there has been a change in income.
Step 6: Summarize your current financial situation
Keep in mind getting your financial situation under control may and can take some time so be patient and continue working toward your goals. Don’t be afraid to consider community resources along the way. Every little bit helps.
Michigan State University Extension has a toolkit for homeowners who are experiencing or have previously experienced foreclosure. This toolkit will equip these individuals and families with tools to help them recover their financial stability, in the case that a recovery of their home is not possible. The toolkit is available to download free at MIMoneyHealth.org.