7 Steps to Avoid Financial Difficulty
Having to sell your home, or even worse, lose a home to foreclosure due to financial circumstances is tragic, particularly if it is avoidable. Here are seven steps homeowners can take to improve their finances and avoid household financial difficulty.
- Prepare a household income & expense report. Businesses know that to be successful they must track their income and manage expenses. It’s also the focal point of one’s home economics. An income & expense report is a historical look at where the money came from and where it went. I recommend using home financial management software, such as Quicken or Microsoft Money. Both tools allow the user to input their income and expenses as well as to categorize those events (salary, groceries, utilities, auto payments, etc.) Also, both software tools allow the user to easily generate reports, including Income & Expense reports. With the report in-hand, you’ll know where your money is going. And that’s half the battle.
- Create a budget. Ever find an extra $20 bill in your pocket? What’s your first reaction? If you’re like me, it’s deciding whether to upgrade my lunch experience or to go out shopping for something I probably don’t need. Your checking account is a lot like that $20 if you don’t have the funds budgeted for a particular purpose. Find a way of disciplining your spending within your means, whether it’s using the aforementioned financial software, writing out your allowable spending on a piece of paper, or putting your funds for each category into an envelope (real or virtual). Use your income & expense report to initially figure out where you need to budget then adjust from there. One trick our family uses is to purchase gift cards for our favorite restaurants at the beginning of each month (in our case $40 for Pizza Hut and $50 for Red Robin). We schedule our dining out and make it a family event. It also keeps our eating out expenses under $100 per month.
- Change your habits. I’m certainly not the most clever when it comes to saving a few bucks—I’m not a coupon clipper and I’m not very good at looking for sales—but I’ve been able to save significant money by examining my daily habits and adjusting them. For example, I used to go to Starbucks and pick up two café mochas (one for me, one for my wife) after dropping off my daughter at daycare. Cost: $8 per day. It may seem harmless enough until you do the math…that’s $176 per month if I do that every workday! Well, I wasn’t about to give up my mochas, so I invested in a nice espresso machine and now make my mochas at home for a fraction of the cost. So far, the machine has lasted me over 10 years and has been a great investment. And I think my mochas are better than Starbucks’.
- Adjust your subscriptions. I use the word subscriptions to describe recurring costs, such as phone, electricity, and water. Amazing monthly savings can be realized by eliminating the elements you don’t use or creatively combining services.
- Phone – consider going cellular and cut the landline.
- Electricity – Time of use plans can result in significant savings or use budget billing to pay a consistent amount each month rather than experience high summer bills.
- Television – try a basic plan or at least eliminate the premium channels.
- Home loans – interest rates are at all-time lows. See if refinancing is an option for you.
- Health insurance – shop around every year or so to keep you rates low. Eliminate unnecessary riders, such as maternity, if it’s applicable.
- Home services – Do it yourself landscaping, housekeeping, and pest control is very cost-effective
- City services – Landscaping is the largest consumer of household water. Adjust usage schedules based on the time of year and type of plants.
- Pay yourself. With each paycheck, put some away for emergency savings. Build up an account with a minimum of two months’ living expenses. Once you’ve reached that level, build it to six months’ worth. You’ll feel a lot more comfortable should something unexpected happen.
- Reduce and eliminate debt. The reason that people lose their houses is because they owe someone money and are unable to pay it back as promised. Mathematically-speaking, you should payoff your highest interest debts first, but I recommend paying your smallest debts first. It takes advantage of encouragement-currency; the fact that you are encouraged and inspired as you eliminate your debts is valuable. Once you have paid off one debt, apply those payments to the next larger debt. While this is going on, be sure to not add any additional debt to your obligations.
- Reward yourself. When you reach financial goal, reward yourself, but keep in commensurate with the goal. For example, when you put your annual budget down on paper and commit to it, go out for lunch or dinner and celebrate. Just make sure it’s a part of your budgeted amount!
The great thing about these habits is that most are one-time activities with occasional check-ups along the way. But even better, they establish the necessary habits for good financial health. Besides, I’d rather help you sell your home because you want to sell, not because you have to.