Homeowners Guide – Getting a Good Handle of Your Financial Position

Gaining financial leverage does not necessarily mean that you need to have a substantial pay package, own a large home or drive a high-end car. The critical aspects of your financial management are your competency and capability to handle your personal finances sensibly so that you are able to live a comfortable life. A comfortable living means that you are able to enjoy healthy environment, eating, adequate shelter and clothing. It is important that you are able to satisfy your needs as well as your wants by having sufficient amount of money. The source of funds to support your kind of lifestyle must come from your earnings and not from borrowings. The core foundation of a good financial management is the development of the right habits in handling personal finances. Proper management of personal finances must be second nature to you.

In order for you to have the necessary finances to support your home improvement project or upgrade, personal finance experts recommend that you start by plugging the leaks of your financial portfolio. This means that you must identify the problem areas and start implementing corrective actions to resolve the issues. These “financial cracks” may have different forms for every family.

The following is a quick rundown of the most important tips that you have to follow in order to “plug” those leaks in your financial portfolio:

1. Gather the basic information about your finances

You need to establish a complete profile of your finances. It is also essential that you get data and information that would cover a specific time range. For instance, you have to get hold of your credit card bills and bank statement for the last six months. As soon as you are able to gather all the information about your expenditures and incomes, the next thing that you must do is to group these items into logical categories. You can perform this task by using your own spreadsheet or choosing one of those spreadsheets that are available online.

2. Sum it all up

As soon as you are able to completely organize the expense items, sum up the items in each of the categories to determine what your financial position is in each of the main expense categories. It is important that you don’t under-estimate your income and expense items.

Here are the major items which you need to carefully assess to ensure that you get an exact measure of your financial position:

• Income source – all sources of income, including your salary, bonuses, rental income and benefits.

• Housing expense – utilities and maintenance, insurance, property taxes, mortgage payments or rents

• Communication – internet, home phone, cell phone

• Entertainment and Leisure – vacation and travel, health clubs dues, liquor and beer

• Children stuff – parties, gifts, lessons, clothing

3. Compute your percentages

Use your NET income as your base figure in analyzing the specific items of your personal finance portfolio. Financial experts recommend that your mortgage or rental payments must not exceed 30% of your net income. Other basic guidelines that you have to follow in managing your cash outflow include 10% of income for compulsory savings, 15% of income for debt servicing and 15% of income for transportation expenses. There may be some aspects of your personal finance where you breach the upper limit. This may be allowed for a few items. However, if you are going beyond the limit in almost all of the expense items, then you really have your work cut out for you.

4. Establish your priorities

Determine which items are more important than the rest. In the event that you need to overhaul your expense items, then it is incumbent upon you to make adjustments or give up items you consider of less importance than the rest of the expense items. In most instances, major adjustments are usually done on items involving recreation and entertainment.

5. Formulate your monthly budget

The last thing that you must do once you are able assess the critical aspects of your personal finance portfolio is to formulate a monthly budget. With the proper handling of your expense items, you will be able to come up with a financial template that achieves a perfect balance between your essential expense items and fun stuff.

Learn how to sell your own house here: For Sale By Owner

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Personal Finances FAQ:

Question: What personal finance records should we keep at home or in safety box?
I keep everything at home and a lot of it I did not need, but recently moved and somehow lost most of it. Yes, I certainly do blame myself….How many years of tax returns should we keep and where? ( i can only find 2 yrs back) What documents should we have concerning our home (title, deed of trust, etc). Where and how can I get copies of these docs that I need?

Answer: Personally, I keep all tax records for seven years as well as bank statements. In addition, you should keep copies of wills, powers of attorney (medical and general), life, auto and homeowner’s insurance policies, and an extra key for your home and cars – so you know where it always is. I also have a special section for warranty papers on household items we purchase. You can get copies of your titles and deeds of trust for property from the courthouse in your county of residence, or from the lender if you still owe. Automobile title copies can be purchased from the bureau of motor vehicles.

Question: What is the best personal finance book to start with?
I am 28 years old, single and made $41,000 last year. I am struggling financially due to my own ignorance and need to get a hold of the reigns.

Dave Ramsey and Suze Orman have some pretty mixed reviews on how overly simplistic and what a waste of money their work is and Givens sounds too risky. Where should I start? What do you recommend?

Answer: Try the Idiots and Dummies guides on personal finance / money management. Yes, it’s incredibly simple, but it’s a good foundation, and even financially savvy people can pick up a few tips and refresh themselves on good reminders there.

Then move on to David Bach, David Ramsey, and/or Suze Orman. They all give very similar advice, and it’s all very sound. Maybe not all of it will apply to your situation, but you pick and choose the parts that are relevant to you. Remember, you’re not looking for the hot magic stock tip that will make you instantly rich – you’re looking for practical real-life advice on how to maintain and improve your actual finances.

Don’t expect to go from novice to expert overnight, or expect one book to provide you with all the answer. Read several, then mull it all over and form your own opinion of what is best for you.

Question: How can budgets help people to manage personal finance?

Answer: By first tracking what you are spending and what you are spending it on. Then comparing that to a proven program that outlines what percentage of your income should be used for what expenses. That will balance your finances to eliminate debt and live within your means. The good thing about a budget is that you can adjust it based on your lifestyle as long as it remains balanced.

Question: What are the tools of the trade for personal finance?

Answer: You need a personal life plan, a personal budget and a personal balance sheet. After that you may need some financial coaching or financial therapy to help you get past your human foibles and enable you to use these tools rationally.

Question: Personal finance planning?
I am 25 yrs old, and feel its important to start planning ahead of time, but I don’t know what to do. Should I buy stocks? bonds? mutual fund? All these seem confusing. So then I figure why not look for a professional, and saw the Ameriprise commercial on tv, so my question is would you recommend Ameriprise? If so, how much money should I have before I contact them? What other advice you would have for a starter in personal finance planning?

Answer: 1. First you need an emergency fund of 6-8 months’ living expenses (not income, what you actually need to live). Don’t even think about investing until you have this.

2. Then you need to have your various insurances in line: HO or renters, auto, health, life if you have dependents (none if you don’t), personal liability if you own a home.

3. If you have dependents, you need a simple will. IRAs and 401ks and life insurance pass by beneficiary form, not your will, as do joint assets. But if you own a car in your own name, or have personal property, these pass by will. If you’re single, in most states your parents would inherit. If you’re married, your wife and kids. Do a cheap will online or with Quicken Willmaker, then pay a lawyer for one hour to look over it and make sure it says what you want (not what you think it says). Look for a woman atty, they’re cheaper.

4. Only THEN should you think about investing. Ameriprise is fine, but they are “boiler-plate” and they are really looking for people who can invest. You are probably not at that stage yet. Maximize your 401k contributions before starting an outside investment program.

Read, read, read, before investing. Look online: Investopedia.com, morningstar,com, fidelity,com, vanguard.com–all have educational sections and you don’t have to invest anything to access them. Don’t invest in anything you don’t understand, and don’t invest any money you can’t afford to lose. Once you have funded your emergency fund and 401k, start a personal investment program with $10-15,000. There’s nothing wrong with cash in the bank till then. Good luck! Wanting to save is half the battle.

Question: What is a good book on personal finance?
I want to do a better job managing my money.

Answer: Any book by Suze Orman. I would also watch MSNBC. Here is a tip if you don’t want to spend money on a book, go to your local library and they should and almost always have a section with books full of personal finance information. That way you spend no money and have access to several different ones.

Question: From a tax and personal finance standpoint, why should an employee ALWAYS invest in an employer’s 401k?

Answer: That’s only true if an employer offers you a “match” on the 401(k) plan. Matching funds are extra money that an employer gives you as an incentive to save for retirement. However, when there’s no match, an IRA can be a better choice because you have control over it and there’s more flexibility in your investment choices.

Question: How is a spreadsheet superior to a cash book in keeping and analyzing personal finances?

Answer: A spread sheet is better cause it also allows you to determine taxes and multiple other equations allowing you to figure out your balance even easier than calling the bank.

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