I Need to Improve My Financial Situation. Where Do I Start?

Maybe your credit needs work. Maybe you have debt. Maybe you are living paycheck to paycheck or feel like you should be doing better with managing your money.

Where do you start? Start with what is happening right now. Before you can improve your finances, you need a clear picture of them.

1. Know What Is Coming In and Going Out

Start with the money your household actually has available each month after taxes and payroll deductions. If your income changes from month to month, review several months and choose a conservative amount to plan around rather than budgeting from your highest earning month. Then look at what you actually spent, over the last month or two. Use your bank and credit card statements instead of relying on memory.

Separate your expenses into a few simple groups:

• Needs: Housing, utilities, food, transportation, insurance and other necessities.
• Debt: Credit cards, personal loans, student loans, collections and other obligations.
• Everything else: Subscriptions, dining out, entertainment, shopping and other flexible spending.

You are not looking for perfection. You are trying to understand where your money is going.

2. Protect the Essentials First

If there is not enough money to pay everything, every bill does not carry the same weight.

Protect the things that keep your household functioning first. That generally means rent/mortgage, utilities, food, necessary transportation, insurance and other essential obligations. Then look at the consequences of falling behind on your other bills.

If you know you cannot make a payment, contact the company or creditor. Ask whether payment arrangements, hardship options, or different due dates are available. Ignoring a bill usually gives you fewer options, not more.

3. Know What You Owe

Make one list of your debts.

For each debt, write down:

• Who you owe
• Current balance
• Monthly payment
• Interest rate
• Whether the account is current or past due

Seeing everything you owe in one place may be uncomfortable. You dont have to fix it all today. The purpose of the list is to know what you are working with. Do not worry about creating the perfect payoff strategy yet. First, understand what you owe and which accounts need your attention.

4. Check Your Credit Reports

Your credit reports can show accounts, late payments, collections, and other information that may be affecting your credit. You can review your reports for free at AnnualCreditReport.com, the federally authorized website for credit reports from Equifax, Experian and TransUnion.

Checking your credit report does not hurt your credit score.

Review all three reports. Look for accounts you do not recognize, incorrect balances or payment information, collections, and other information that may be inaccurate. Your credit score matters, but the score is not the best place to start.

Understanding what is on your credit reports is more important at this stage. Once you know what is affecting your credit, you can make better decisions about what needs to change.

5. Start Building a Financial Cushion

You may have heard that you need three or six months of expenses saved. That's a good long-term goal. But it is not many people's starting point. Start with an amount that gives you some protection from the next unexpected expense. That might mean your first $250, $500 or $1,000, depending on what is realistic for your household (consider insurance deductibles, possible car maintenance, etc.). Having some money available can keep the problem from immediately becoming new debt.

6. Decide What Needs Your Attention Next

Once you understand your finances and have protected the basics, your next priority depends on your situation.

You may need to:

• Catch up on past due accounts
• Pay down expensive debt
• Establish or rebuild credit
• Increase your savings
• Prepare for homeownership
• Start saving toward longer term goals

You do not have to work on everything at once. Find out, what is creating the biggest problem right now, and what financial goal do I desire to reach next?

That answer can help determine where your attention goes.

Why This Matters

Improving your finances is not one decision. It is a series of small decisions made in the correct order. Start by understanding what you have coming in, where it's going, what you owe and what needs to be protected. Then work forward from there. You do not need to solve your entire financial life today.

You just need to know what needs your attention next.