Getting Into Good Financial Health

I had a question from a reader about getting their finances in order and where they can seek help. The individual faces many challenges which many people are struggling with: recently starting a full-time job, student loans, credit card debt, future tuition payments and struggling to meet current living expense requirements. Also, the reader recently purchased a condo where mortgage payments will start in one year.

Not sure where to start? Here are some ideas to think about.

Cash Flow and Budget Analysis

You can’t begin to come up with a plan of attack on your debt and future if you don’t have a realistic idea of how much you can dedicate to your debt repayment. You need to determine where, when and how you spend your money. I would suggest, going back through your bank and loan records for 6 months to see what your spending patterns are. You can then see over a 6 month period, how your spending patterns vary, what percentage of your income is going to each category and really give you some perspective to how you’re spending your hard earned cash. When I first started my 25K challenge I was amazed and admittedly, somewhat disgusted at the amount of money I was spending on entertainment. Having a budget gives me the motivation each month to keep on track and it’s become exciting for me each month to sit down and see where I finished up.

Debt Elimination

I would consider paying a visit to the bank to look at loan consolidation. The credit card debt is likely around 20%. Emphasis should be placed on getting rid of higher interest rate debt first. Most individuals will qualify for an unsecured line of credit from their bank. The requirements to qualify are quite low, and the interest rate are much lower than credit card rates, usually prime rate plus 1-3% depending on your credit quality. At current rates, this could mean a rate as low as 6%. You can use your line of credit to pay off higher rate debts(i.e the credit cards). Future loan repayments will make a much bigger dent in your debt with the lower interest rates.

Seek Professional Advice

If you’re not a numbers person and struggling to make sense of your finances, I would suggest seeing an accountant. They can identify areas of improvement and come up with a strategy for debt elimination. As an alternative to an accountant you could see a financial planner as well. However, in my experience financial planners are more focused on getting you to invest in their products rather than investing in yourself. An accountant can take an independent view of your financial situation and recommend a strategy rather than recommend a number of products.