Rebuilding Your Finances
STEPS TO REBUILDING
(Source: Adapted from NeighborWorks and Freddie Mac)
Developing a budget and savings plan is critical to recovering quickly after any financial setup, including a foreclosure or a loss mitigation process. Your options may be constrained due to income or debt issues, credit history, and limited savings. The rebuilding process has several steps.
Step 1: Crisis Spending Plan
If the situation is dire, the first step is to create a “crisis spending plan” which will help you meet your immediate financial obligations. This should focus on “basic needs” priorities such as food, medical bills, housing expenses, utility payments, car loans, child support, and income tax debts. Apply for social service programs that can provide food, clothing, emergency housing vouchers, and emergency utility vouchers to assist you during this transition process.
Step 2: Set Financial Goals
What are your top five challenges and top five assets (financial or behavioral)? Envision your life next year, as well as three and five years ahead. This helps with goal-setting and allows you to plan beyond your immediate situation. Decide whether to focus attention on saving, reducing debt, or increasing income. These are fundamental elements of financial goal setting and planning. Assistance is available from non-profit agencies and community organizations.
Step 3: Estimate Next Year’s Income and Expenses
Review the past year’s income and consider possible changes in the coming year. Next, review debts and expenses. Consider how expenses will change given the new housing situation. Also, determine whether your new housing situation impacts any other expenses like transportation or day care. If necessary, fine tune expenses and create a livable spending plan.
Step 4: Analyze Current Financial Situation & Spending Habits
Review and consider the total balance owing on each debt and the amount of payments due each month. List the changes you must make, or want to make, in the coming year. This becomes your Action Plan.
Review monthly expenses and discuss each item with family members. Rank your expenses from most important to least important. Then list the changes you believe you must make and others you would like to make. These are part of your Action Plan as well.
The final step is Action Planning. Review any savings and investment goals and list ways they could be increased. Every little bit helps. For example, start saving change, saving $10 each week in a safe place at home, or direct depositing $40 each month.
Step 5: Create a Rebuilding Plan
Once the crisis-spending plan has been implemented, tackle the negatives on your credit history and begin establishing good credit. The new spending plan should support payment of all monthly bills on time, and allow you to start paying off past-due balances. Use the steps above to create a written plan that is clear and attainable.
Step 6: Changing Habits
It is time to comprehensively address your spending habits and money management decisions. Ask for advice and guidance and research available resources for a workable, systematic approach to managing your finances. Resisting change and clinging to old habits will not move you forward. Financial freedom becomes more attainable with each spending decision based on your new savings goals. As past due balances are paid in full and bills are paid on time, credit scores will increase. Pay off debt rather than regularly transferring debt to other cards. Apply for new credit only when strictly necessary.
Common stumbling points for many families are managing monthly bill-paying habits, keeping spending records, and conducting periodic reviews. You may not have had successful methods of paying bills and tracking expenditures. The following suggestions can easily be implemented into your new finance management plan:
1. Choose a specific area in your home to be the “office” area.
2. For each pay period, record how the money was spent in a notebook.
3. Work out a bill payment and recordkeeping system that is convenient and easy to use. (Where bills will be put when they arrive, how you will keep track of online bill pay, where you will store and record bills due and paid, etc.)
4. Each time bills are paid; enter the amounts and dates into your notebook. Keep labeled receipts and cancelled checks to help remember to enter other expenses.
5. Practice planning purchases. If you need to replace your vehicle or make some other major purchase, begin making “practice” payments to your savings account in that amount about 3-4 months before you buy. This builds up your savings and prepares you for the impact of the additional payment. Don’t just “say” you’re going to do it - commit to it and start saving those payments so you don’t end up taking on too much additional debt.
6. Near the end of every month, compare your written spending plan from Step 1 with the actual expense record in your notebook.
7. Don’t expect the plan and actual expenses to be exactly the same. Don’t be discouraged if it doesn’t go according to plan each month. Just identify the differences and discuss how you will handle extra expenses in the month to come.
8. Revise the spending plan as necessary.
9. If overspending and excessive use of credit is an issue, think of a “tag” or “reminder” that might cause you to stop and think before you spend money on things that are not in your plan.
10. Keep your savings goals in a visual place. Write them down on a card to keep behind your debit card. Draw a picture and post it in several visible places in your home. Keep talking about goals with your family so you can hold each other accountable when spending starts to get out of hand