December Financial Fitness Challenge--Use Simple Tools to Assess Your Finances
Here's a head-scratcher: More than twice as many people this year as last year are not paying attention to their money. Javelin Strategy & Research, Pleasanton, Calif., found that about one of five (19%), compared with 8% last year, aren't monitoring or managing their personal finances.
"The prolonged economic downturn has made money tight in millions of American households and caused the rise of a nation of 'cautious consumers,'" says James Van Dyke, president and founder of Javelin. "But contrary to what many may think, millions of consumers are monitoring their finances less—not more," he adds. "What you can't see can hurt you, and Americans need to pull their heads out of the sand."
The report also indicates that the percentage of consumers who say they sometimes manage their finances by logging on to monitor checking account balances slipped—to 46% in 2010 from 59% in 2009. Another key finding: Online banking suffered as many consumers switched back to paper and pen to track their finances.
Ignorance is not bliss
Maybe it's recession fatigue. Maybe people think, things are so bad I can't bear to look. Whatever the reason that some people are looking less at their finances, there's too much downside to make this a good idea.
It's important to see the big picture—and the small one—to stay out of trouble and to make progress on your financial goals. And you don't have to do all that much to keep on top of your money. Once you have your spending plan in place, here's a bare-bones approach:
- Weekly—Use your credit union's online access or telephone teller to monitor your checking balance.
- Monthly—Scan your checking and credit card statements to make sure transactions are accurate.
- Once a year—Calculate your net worth to see how things are changing over time.
- Once a year—Figure your debt-to-income ratio.
Take these simple actions and you'll have the information you need to make good decisions about your spending and saving plans.
See the forest, and the trees
Here's how you benefit from each of these activities:
- Monitor checking balance. Once a week is a minimum. At times when you have a lot of transactions going on you might want to check every other day or so. Another reason to check more often: You have a shared account and you and your partner aren't that good about communicating what you've spent, or at keeping and sharing records.
- Monitor monthly checking and credit card statements. Not everyone reconciles their checking account anymore—I confess that I don't. But that's because I can check online to make sure that all income and outgo is accurate. I do the same thing with my credit card statements—look to see that all transactions are as expected. Follow up on even small charges that don't jibe with your spending—they can be a signal that someone is scamming your account.
- Calculate net worth. Your net worth statement stacks up all your assets—the things you own—against your debts. Knowing your net worth over time, and how it's changing, can be either a big pat on the back for your progress or a wake-up call that you're slipping behind financially.
Monitor your checking balance often if you have a shared account.
For example, each year your savings balances should be growing, the equity you have in your house (if you own a house) should be growing, and your total debts should be declining. Even if these changes are slight in a single year, over time you'll see how much progress you're making. That's a big reinforcement for your good habits.
Or, say you increase your debt level one year by borrowing for home improvements—you know that, in time, that will improve your net worth. The key is to look at the big picture as well as to your weekly income and outgo. You're looking for the big changes, so this is not a number you want or need to calculate more often than once a year.
- Figure your debt-to-income ratio. That's the percentage of your gross income that goes to paying debts. To make it really simple, say your monthly gross income—that's your income before deductions—is $3,000, and you pay $1,000 a month for all your debts. Your debt-to-income ratio is 33%. Check this figure once a year or when you plan to borrow.
Say you're about to buy a house or a car—you want to know you're staying in a healthy debt-to-income range so you can be confident the lender will look favorably on your application. When you're buying a house, the conventional advice is that you should pay no more than 28% for all your housing expenses (PITI—principal, interest, taxes, and property insurance) and no more than 36% for all of your combined debts (so add your car loan, student loans, and credit cards to housing expense).
This is the same figure a lender will calculate when deciding whether to lend you money for a house or a car. You're in a stronger position if you already know what the lender will see when making that calculation.
Financial Fitness Challenge
The people at your credit union bring you this Web site and other tools, such as personal finance coaching, to help you make the most of your financial resources. The Financial Fitness Challenge continues to look at ways you can make better financial habits no matter what condition the economy is in.
Each month we randomly select five winners to receive $50 Visa gift cards; we choose each month's winners only from that month's entries, so enter often. Remember to register for the Financial Fitness Challenge.
Susan Tiffany, CCUFC
Home & Family Finance® Resource Center
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