If you are having difficulties keeping up with your bills and monthly repayments, you are not alone. Despite the growing economy, thousands of people are dealing with personal financial difficulties in different forms. The problems usually stem from the same source: mismanagement of income and expenses as well as the overall personal financial state.
Getting back on track and regaining control over your personal finance may seem like daunting tasks to complete when you are underwater, but there are actually a lot you can do right now. You just have to know how to get started with getting your personal finance back on track, and that is what we are going to discuss in this article.
1. Assess the Situation
The first thing you want to do is taking a closer look at your present financial state. In order to solve the problem, you have to admit that you have a problem, and you need to understand the situation fully. This is a challenge of its own, especially if you are reluctant to know the financial state you are in.
The best way to start is with your loans and regular bills. They tend to have fixed payments every month as well as known due dates. List everything and continue with taking a closer look at your income. At this point, you should be able to see the portion of your income you actually spend on regular expenses and loan repayments.
Next, it is time to document your expenses. You can either go through the month and write down everything or try to work backwards and review expenses from the previous month. The former is usually the easier way of the two. Make sure you document every single expense no matter how small it may be.
2. Crunch the Numbers
Now that you have a clearer picture of what you are up against, it is time to work on a plan to improve your personal financial state. With a complete list of bills and loans to pay, expenses to deal with, and the income you actually have available, it is time to work on understanding your ratios.
The first one to calculate is debt-to-income ratio. This is the total amount of your debts divided by your total income; if you receive your pay check every two weeks, use your monthly total income as the benchmark for this process.
Next, figure out your total expense-to-income ratio. Similar to the previous ratio, you want to divide the total amount of expenses, including your energy and other regular bills (aside from loan repayments), by your total income. To complete the set, calculate your surplus/deficit amount: total income – (debts + expenses).
With the numbers in hand, it is time to compare them with the ideal ratios that you need to achieve. Your debt-to-income ratio needs to be no higher than 30%. Anything beyond this number means you are putting your personal finance at stake. You face greater risks of running into problems making monthly payments against your loans.
Your expense-to-income ratio, on the other hand, needs to be well below 50%. If you are spending more than 50% of your income on everyday expenses, you know that there are a lot of unnecessary expenses that can be reduced.
It is also worth noting that you want a surplus of around 20%. This is the money you allocate towards savings and investments. A deficit is a big no; it is a sign that you have some big changes to make. That brings us to our third step, which is….
3. Time for Some Changes
There are three practical things you can do to start regaining control over your personal finance. First, you want to get your loans in order. If the repayments are greater than 30% of your income, you need to work towards reorganizing your loans immediately. You can focus on repaying the smaller or the costliest ones, and then work your way towards getting the other loans settled as well.
You can also choose to consolidate your loans, especially when the existing ones cost too much. Rather than spending more money on late fees and high interest, it is much more economical to consolidate the high-cost loans into one, very manageable debt.
Expenses are your easiest hurdle but getting your expenses in order does take a bit of discipline. Take another look at your list of expenses and be prepared to cut expenses that are not absolutely necessary. Go back to the bare minimum so you can allocate more money towards repaying your loans.
While you are at it, find new sources of income. Thanks to the internet, you can now apply for remote jobs or open your own ecommerce store. The more you work towards getting the numbers to their ideal levels, the more control your will have over your personal finance. The rest will be easy from this point.