A Smart Way to Stay on Track
Some people like exercise, some people don’t, but almost everyone feels good afterward. The annual financial checkup is like that. If you’re not into it … well, lace up your cross-trainers and do it anyway. You’ll be glad you did. Regular reviews of your finances can keep you on track or help you correct course before it’s too late.
The checkup outlined here is by no means a complete financial review. It doesn’t go into your will, college funds, retirement strategies … planning happens on multiple fronts these days. But it will go a long way toward smart, stress-free homeownership.
Here’s what we’re going to cover:
- Goal setting 101
- Reviewing your budget
- Scrutinizing your debt
- Reviewing your mortgage
- Examining your credit reports
- Building a safety net
- What to do if you’re struggling
Goal Setting 101
In order to get focused, take control of your money, and measure your progress, it's important to set goals. Here are five tips to help you do it right. Check out Mind Tools for more detail.
- Set just a few goals. Too many, and you’ll lose focus.
- Make goals SMART: Specific, Measurable, Attainable, Relevant, and Time-bound. “Attainable” is key. Don’t set yourself up for failure!
- Put it in writing using strong, positive terms: “I will,” not “I would like to” or “I won’t.”
- Make an action plan with mini goals along the way, and rewards for meeting them.
- Stick with it. It’s a process.
Start with Your Budget
How Did You Do?
Look back on the last year. If your answer to any of these questions is no, figure out why.
- Did you review your budget monthly?
- Did you stick to your budget?
- Did you earn more than you spent?
- Did you set specific financial goals and then meet them?
- Did you use any surplus for longer-term goals like savings or debt payoff?
Where Can You Save?
- Look at all the year’s spending and evaluate needs vs. wants. Is there anything you can comfortably cut or cut back?
- If you haven’t comparison-shopped on fixed expenses, for example your home and car insurance policies, pledge to do it.
- Same for flexible expenses like cable, internet, and phone plans.
- Are you taking advantage of all the tax deductions you can? You might want to consult a professional tax preparer. Keeping good records is key. (See “Tax Basics for Homeowners.”)
Can You Increase Your Income?
- Are you due for a raise? Check out “How to Ask for a Raise — and Actually Get It.”
- If there’s a gap between your income and your spending that you just can’t close, or if you’ve been unable to save, consider taking a part-time job.
What's Coming Up?
- Have your goals changed?
- Has your life changed, or do you expect it to? You might need to adjust your budget.
- Anything you need to start saving for? Big-ticket home maintenance, maybe?
What? You don’t have a budget?
If you haven’t already created a budget, seriously, get on it! Options:
- Download our budgeting worksheets from the Lesson 1 resources in the homebuyer course.
- Create a custom spreadsheet.
- Automate your budget with a website like Mint or LearnVest.
- Check out your bank’s website for budgeting tools.
You can review budgeting basics in Lesson 1 of the homebuyer course. Remember, there’s no one way to make and manage a budget. It just has to work for you.
Scrutinize Your Debt
- What’s the total amount you owe? Is it going down? To calculate your debt-to-income ratio, divide monthly debt obligations by gross monthly income. Aim to stay under the industry standard of 36 percent.
- On credit card debt, are you able to make more than the minimum payment?
- Is your credit card debt going up because of surprise expenses? That’s a sign that you need to save more.
Review Your Mortgage
- Have interest rates gone down 1 percent or more? Should you refinance? In your first year of homeownership, the answer is probably no, but remember, you’ll be revisiting this question every year.
- Are you making extra payments on principal? Play with an amortization calculator to remind yourself what a difference it makes, especially in the early years.
Examine Your Credit Reports
Remember, mistakes on these reports can damage your credit history and lower your FICO score. That still matters — if you ever want to refinance, for example. Your score also affects your home and car insurance premiums.
- Once per year, you can get a free copy of your credit report from each of the three credit bureaus. Order them from annualcreditreport.com. While the report is free, there’s usually a fee for your FICO score.
- Any errors? Dispute them. (See Lesson 1, Topic 2 in the homebuyer course. Here’s a sample dispute letter.) If your report changes as a result, you’re entitled to another free copy.
- Your credit reports are one place where signs of identity theft can show up. Look for accounts that aren't yours, activity on accounts you haven’t used recently, and unauthorized entries in the inquiries section of each report. If you think someone’s using your identity, report it and get help at IdentityTheft.gov.
Build a Safety Net
How’s Your Emergency Fund?
An emergency fund can be hard to save, but the stability and peace of mind it brings can’t be oversold!
- Is your fund big enough to cover your fixed expenses for at least three months? (Financial planners often recommend six months of funds.) If not, do you have a savings plan in place?
- Does your fund match your current life? If your expenses grow, it needs to grow too.
- Did you meet your savings goal for home maintenance? Or did you come up short? (See “Let the Home Maintenance Begin!”)
Are You Properly Insured?
Insurance is your safeguard against unanticipated expenses so big that you would have trouble recovering.
- Is your home insurance still adequate? For example, renovations might raise your home’s replacement value. (See “Home Insurance 201.”)
- Is your health insurance adequate? If you have high-deductible insurance, have you started a health savings account?
- Do you have enough car insurance, especially liability insurance? (Or do you have too much?)
- Do you have disability insurance? Should you? Verify the benefits you have through your employer.
No Foreclosures Here!
The biggest cause of foreclosure is personal financial crisis, typically brought on by unemployment, major home repairs, medical bills, or overextended credit. The best way to avoid foreclosure is regular financial review and budgeting. But if, despite your best efforts, you find yourself struggling to pay your mortgage, be proactive:
1. Contact your loan servicer ASAP. Don’t be embarrassed. They have trained specialists ready to talk with you. Waiting only narrows your options.
2. Contact a Homeownership Advisor. They’ll give you confidential, free advice and even negotiate with your servicer. Find a certified, nonprofit advisor via our website.
3. Watch out for scams. Mortgage relief scams multiplied after the housing crisis, which is another reason to rely on a trusted Homeownership Advisor. Learn about scams at the Federal Trade Commission and Making Home Affordable, a joint program of the US Treasury Department and HUD.