Calvin Coolidge, the 30th President of the United States, once said, “There is no dignity quite so impressive and no one independence quite so important as living within your means”. This day in age it is a common habit to try to keep up with the Joneses. It is tempting to live in debt and not look at our credit score directly, hoping that it will fix itself. Everyone is doing it, right?
Living this way can be stressful. Even if you are making a good paycheck, if you are spending more than you make, you may be one paycheck away from destitution. It is time to curb your spending, reign in your debt, and rebuild your credit. It won’t be easy, but it will be worth it.
Curbing Your Spending
“Living within your means” means that you spend less or equal to the amount of money you make. Credit cards and loans allow many people to buy more than their actual income will allow. Living in this fashion is reckless and can cause a lot of undue stress. Financial advisor David Ramsey advises, “You must gain control over your money or the lack of it will forever control you”.
To start living within your means, you have to know what you actually make. This isn’t an area you want to estimate. You need to find out what the net income on your paycheck is and how often you get paid. Most bills and payments are made on a monthly basis, so you will want to know what you make on a monthly basis. If you are paid weekly, multiply by four. If you are paid bi-weekly, multiply by two.
Now that you know how much you make, it is time to figure out how much you are spending. A budget is a great way to not only see where your money is going but to plan your spending ahead. Go through all your past credit card and bank statements. Divide your spending into different categories like housing, utilities, groceries, entertainment, savings and debt payments. Choose categories that work for you.
Start writing down what you spend money on. You should know what your regular monthly payments are for bills and rent or mortgage. Set a limit on your frivolous expenses so that you don’t exceed your income. Franklin warned, “Beware of little expenses; a small leak will sink a great ship”.
If you find that your bare minimum expenses for survival exceed your current income, then you need to find a way to make more money. If you usually get a tax refund, you may need to adjust your withholdings so you get more money in your paycheck. Also, make sure you are not paying for benefits that are offered through your employment. Finally, you may need to seek out a higher paying job or pick up a second job to make ends meet.
Stop using credit cards to purchase items. That is not real money unless it is coming from your bank account. Instead, save up for purchases. This helps keep you from impulse buying as well. You may find you are actually more satisfied with the purchases you do make. The problem with credit cards is they often lead you to buy things you can’t actually afford.
Start saving. You need an emergency fund of at least $1,000 to start with. Consider having a certain percentage taken out of your paycheck and deposited directly into your savings account. Don’t touch this money unless it is actually an emergency. Ultimately, you want to save enough money to cover your living expenses for at least three months. This will provide you a safety net in case the unthinkable happens.
Repairing Your Credit
It doesn’t take much to damage your credit score, and it can take some time and effort to repair. A credit repair company help guide you to a better credit score. “Choosing the right credit repair company, may be one of the best things you do for your financial future,” CreditRepair.com president Scott Smith said.
Here are some things you might start doing now to help get the ball rolling.
Open a bank account.
Some banks offer accounts with limited services and higher fees for individuals with bad credit. It is a start in rebuilding your credit score.
Use your bank account as collateral to obtain a secured credit card.
These cards only let you spend up to the amount in your bank account. Avoid cards that require an application fee. Choose a card that will convert to an unsecured card after a period of making on-time payments. This is a great way to build create as well as learn better credit card management. Ric Edelman, the author of “The Truth About Money”, when asked, offered the advice, “For a credit card, it would be to pay off the balance in full every month”. Don’t use credit cards as a way to spend more than you make.
Know your credit utilization rate
Credit score models pay attention to how much you owe compared to how much credit you have available. A high credit utilization rate can have a negative impact on your credit score. It should never be utilizing over 30 percent. One way to reduce your rate is to pay off existing debt.
Make paying off student loans and other debt a priority
Student loans, in particular, follow you throughout your life and cannot be discharged through bankruptcy. Pay these debts consistently and on time. It will look good on your credit score.
Work on improving your spending habits
Limit the number of credit cards you have in your possession. They can get you into trouble. Avoid maxing out your credit cards. Save up for big purchases and pay in cash instead. Set a reminder on your phone so you always make payments on time.
Managing your money can be hard. It is easy to just spend, spend, spend until there is nothing left. Take the time to create a budget, so you know where your money is going. Practice spending less than you actually earn. Once you have a better handle on your finances, start working on building your credit or rebuilding it. A bad credit score can make even renting a house difficult. Consider paying a credit repair company to help.