Last week I talked about using a GPS or an APP for directions. I related the GPS to your financial journey and the need to understand your starting point before starting the journey from where you are to where you want to be.
Whether you want to give more, save more, pay off debt or simply be a better steward, it all starts with acknowledging that something needs to change and figuring our exactly where you are so you can change directions. The first three steps from last week were:
1. Where are you on the Compass Money Map?
2. How Much Debt Do You Have?
3. What’s Your Net Worth?
This week there are three more steps to help you figure out your current financial location.
4. Where is Your Money Going?
Everyone should know how much money is coming in, how is it being spent, and how it is being saved. If, at the end of the month, you don’t have any idea where the money went, or how much you spent on groceries or entertainment, you have no hope of managing it.
Knowing where your money is going provides a baseline for where you are now and allows you to start making purposeful decisions about how you want to improve things going forward.
The most important thing you’ll get from knowing where your money is going is information so you can decide if you really want to continue spending money that way or if something needs to change.
We talked to a young man who estimated he was spending $50 a month on restaurant lunches. After tracking his spending for two months he learned he was actually spending $260/month on restaurant lunches. His comment was “I can’t afford that. I have more important priorities.” By tracking his money, he had enough information to make an informed decision.
Some tools to help you track your spending are: the Compass Catholic 30-Day Income and Expenses spreadsheet to log your daily spending into different categories. You may also want to investigate Apps and software such as You Need A Budget, Mint, Pocket Guard, Good Budget, Mvelopes, Wally, Level Money, Quicken, Money Dance, Buxfer.
5. How Long Can You Handle a Financial Crisis?
No stream of income is guaranteed. You may get laid off. The company you work for may go out of business. A two income family can suddenly become a one income family. Inflation could soar.
We encourage people think through the “what if” scenarios and determine the most likely situations that would apply to them–layoffs, your employer going out of business, etc. Then use the information you gained from tracking your spending to prepare for the most likely scenario. Look at your spending objectively to decide where cuts can be made to handle the decreased income. We call this a Crisis Budget and encourage everyone to have one.
If a crisis is potentially on the horizon you will be prepared to make change to your spending IMMEDIATELY, instead of using credit cards to subsidize your lifestyle as so many people do.
You can start living the crisis budget proactively if there are rumors of a layoff at work. If the crisis goes away, great! The worst thing that can happen from living on the crisis budget is it won’t be much fun. The best thing that can happen is that you will save some money. Either way you’ll be putting your self in a better position to handle it when the crisis actually occurs.
6. What’s in Your Credit Report?
Order a free copy of your credit report from AnnualCreditReport.com. This site allows you to request a free credit report, once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion. We recommend ordering a report from one of the three agencies each quarter.
Review your credit report regularly and report any inaccuracies to the credit bureaus to ensure your credit report accurately reflects your actual credit history. Seventy-nine percent of credit reports contain at least one mistake. Fifty-four percent of credit reports contain identifying information that was misspelled or outdated, belonged to another person, or was otherwise incorrect. Thirty percent of credit reports incorrectly show accounts as open that had previously been closed by the consumer. It is important to stay up to date with your credit report to ensure it is correct
This will give you a sense of your credit history and show you any delinquencies or dings to your credit, but it doesn’t provide you with an actual credit score.
The easiest way for most people to get a a copy of their credit score is to sign up for a free Credit Karma account. By entering your personal information, you’ll gain access to a wide range of details listed on your report—plus estimated credit scores from both TransUnion and Equifax.
Your credit score is a three-digit number indicating if you are a good credit risk. Numbers range from the 300’s to the 700’s. For the most part, an excellent credit score (720+) is enough to qualify for the best loans and rates. Scores from 650-720 are good and anything below 650 is a problem.
It isn’t just a measure of your financial health; this three-digit number can be used to decide if you qualify for a loan and how much interest you’ll pay on that loan, if you can rent an apartment or even if you qualify for a job.
These six different tasks to help define where you are financially will provide a good starting point for your financial journey. Be sure to include God in your plans through prayer and supplication. Meditate on this verse from the book of Judges 18:6 (NABRE.) “The priest said to them, ‘Go in peace! The journey you are making is under the eye of the Lord.’”
Read our next blog on how to define where you are going.