How Do I Start Ordering My Personal Finances?

I love to answer questions posed by readers. I recently received this question from one of my personal finance blog readers:

"I would like to get my finances in order, currently I make about 21,000 a year. I have experienced major setbacks with unemployment for a year, I have a college degree. My financial situation is check to check...My total amount of debt not including student loans is about 15,000. I have been debating about bankruptcy for the last two years. I would also like to buy a house in two years or so. I just need to know where to start to get my finances in order."

Here is what I suggest: The best place to start is with an honest financial evaluation. Look at what you make each month, and honestly look at what you are spending money on each month (my guess at this point is that you are making crazy payments on your debt). See how much you have left over after monthly bills are paid. Look at your other spending to see where you can cut back. $3 or $4 on a latte each day may seem like a little bit, but that can be $60 to $120 per month. Also, look at what you spend your money on. I don't know your exact situation, but a few years ago when I was digging out from under debt racked up in college, I realized that many of my "necessities" were really wants. If you have cable, you might consider dropping it until you are on sounder financial ground. Likewise the cell phone. Try to find a different plan, or see if getting rid of the cell phone and getting a land line would be cheaper. If you don't use the Internet at home for work purposes very often, consider getting rid of that too and going to the library to check email (you can also check out movies and books for entertainment).

Here's how my monthly savings stacked up once I got rid of the things my generation views as essentials:

• Cable: $60
• Cell phone ($50 - $20 for landline): $30
• High-speed Internet: $45
• Dinner out twice a week (changed to once a month): $150
• Daily snack: $70
• Apartment downgrade (2 bedroom/1.5 bath to one bedroom, one bath with smaller kitchen): $175
• Using public transportation (didn't sell my car, but I did stop driving it): $100 in gas
• Renting movies (switched to library): $25
• Total: $655

And that's not even everything I cut back on. I bought fresh ingredients at the store and cooked more from scratch. And I switched to generic brand food, rather than name brand. And I bought less trendy clothing so that my clothes would survive to be worn another season. Go through and see where you can cut back. Getting your finances in order takes a great deal of work and serious lifestyle changes. Sometimes it means less eating out and more cooking for yourself. You may have to sell some luxury items and find a smaller place (with a smaller rent payment). If you live in a place with good public transportation, you can sell your car (a car is an enormous expense with payments, insurance, gas and maintenance).

But to start, a thorough financial looking-over is needed. It can help to have a friend or relative help you go through everything and be brutally honest with you, pointing out where you really can cut back (even if you think you can't).

A note on bankruptcy: Bankruptcy sticks around for 7-10 years on your credit report. If you want to buy a house in 2 years, bankruptcy is not an option right now. If you waited 5 years to try to buy a house, you would probably have better luck. But with the current subprime lending crash, bankruptcy dragging down your credit will severely damage your chances. There are different debt management programs you can enter that can help you get into a regular payment schedule, but be careful, since some programs are shady. Your best bet is to get everything in order and go through active debt reduction. This will help you boost your FICO score, making it more likely that you will be able to buy a home. Hope this helps you get started!


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financial goals, bankruptcy, debt management, debt reduction