Declutter Your Finances

Declutter Your FinancesRecently I began to tackle a project that I had been thinking about for months: re-organize and clean my home office.

It needed to be done because it was no longer a good working space. Since I work from home, this was an essential project.

I am very organized person so I tend to have everything in folders and binders, but even for me you can easily accumulate more than you need over time.

But with the summer just starting I found myself with a little time to finally tackle it. So a couple of weeks ago I spent around 4 hours just getting rid of old documents and other items that were not longer needed.

I also changed the location of my printer and my filing cabinets (optimizing space) and made some room for books that were just in a pile in a corner. Finally, I bought a new and much needed wireless keyboard.

I ended up with a much better work space. I have some more cleaning up to do, but finishing at least the first part of that project gave me a great sense of control and peace.

It also put me in a better frame of mind to work.

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Is it Time to Declutter your Finances?

When we talk about managing our personal finances, clutter can also become a part of the experience.

It is possible that you have not taken a hard look about what you are doing to manage your money in a while. It is possible that this neglect has made things more complicated and perhaps less pleasant.

And you are not in a good frame of mind to work on your finances, you progress can be hindered.

With that in mind, I want to give you a few tips that I have picked up over the years to organize and operate our financial management system.

Bill Management

We are 15 years into the 21st century and we are in the midst of the Information Age. We can use this to our advantage.

  • Go from paper to online/e-mail delivery.
    • If you are adept at using a computer and the internet, this is a great option to eliminate paper clutter in your house.
    • Most service providers give you this option. Of all our monthly bills only one comes to the house via regular mail and that’s because the service provider does not offer the electronic option. Everything else comes to us electronically.
  • Use financial management software to manage your bills and track your expenses.
    • Set monthly reminders of when bills are due. It is easy if you have a busy schedule, to forget when every bill is due. Perhaps you are used to just waiting for that bill to be delivered in the mail. Take control and set some reminders for yourself.
    • Plan when bills are going to be paid. You probably already do this in your head. For each pay cycle, you know which bills get paid. In my case, I get paid twice a month. With the 1st pay check we cover the mortgage, the cable/online bill, and our cell phones. With the 2nd pay check we cover utilities and auto insurance.
    • I have setup our money tracking software with those dates as monthly reminders to make sure that payment goes out on time.
    • By using software you can easily produce are report of you are tracking against your budget for the month.

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Online Banking

In this Information Age, we can also take advantage of online banking. Most banks and credit unions offer this option. Here is a few of the things you can do:

  • Always have access your accounts online and keep track of when payments and deposits are processed.
  • Get your monthly statements online and easily reconcile them.
  • Pay your bills via your bank and avoid delays associated with regular mail. You can also set some recurring bills to be automatically paid for you every month.
  • Easily transfer money between your accounts.
  • Most banks and credit unions also offer applications (Apps) for your smart phone so you can do everything you normally would do on your computer via your phone.

Stay in Control

One of the keys to winning with your finances is gaining control over what’s happening to your money.

You can have more influence in the outcome of your finances if you stay on top of them.

I have shared some of the tips that have helped me stay ahead of the game.

I hope they help you stay ahead of your financial management game.

Question: What steps could you take today to declutter your finances?

The Great Financial Numbers Fight: Net Worth vs. FICO Score

The Great Financial Numbers Fight: Net Worth vs. FICO ScoreAre you a boxing fan? I am, although in the last few years I have lost interest in the sport due to the many judging controversies and the lack of really, really great fights.

I recently watched a documentary of the great 1980 fight between Sugar Ray Leonard and Roberto “Hands of Stone” Durán. It was the infamous “No Mas” fight.

It reminded me that while I was growing up, there would always be a great fight on the horizon.

How is boxing related to finances? Well, I think it’s time to have a great fight between two financial numbers. I believe most of the advice offered today by the conventional wisdom is focused on the short term as opposed to the long term impact on your financial wellness.

And focus is key for your finances. You need to pay attention and take control of your money. But remember, in money and in life whatever gets your focus and attention will be what generally improves.

So where should you and I focus? I want to start a great fight (i.e., conversation) about these two financial numbers: Net Worth vs. FICO Score.

Let’s agree that for these two numbers, the greater the number the better the situation. And let’s see which one is more beneficial to your long term financial wellness.

So let’s get ready to rumble!!!!

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Tale of the Tape: FICO Score

What is it? The FICO score simply measures your level of interaction with debt. How much you money you owe, the type of debt, the length of your debt history, record of payments, etc.

Here are the components of your FICO Score (via the FICO website):

FICO Score Components

In other words, the algorithm for computing your FICO score does not take into account your salary, length of time in your current position, or your level of savings and investments.

Why do you need it? Well, if you want to borrow money for anything, a FICO score is one of the key components used by lenders to assess your credit worthiness.

The only reason to really worry about having a good FICO score is because you want to borrow more money. A bigger FICO score means lower interest and higher borrowing limits.

The biggest reason the conventional wisdom says you need a good to great FICO score is to borrow money for a home. But let me tell you this: my wife and I refinanced our home 3 years ago and the FICO score was just one component of the process.

The bank still wanted to know that I had a steady job, that I had enough money saved for a good down payment, and that we had very little or no debt.

Furthermore, the new borrowing guidelines that went into effect this year are taking us back to more traditional lending practices. So, the FICO score is not the main component in whether or not you get a mortgage.

How can you improve it? Well, there is only way to maintain a good FICO score. You have to borrow money all the time and pay it back in time. You don’t want to be late and you don’t want to have “bad debt” on your record.

In other words, you have to be in the endless cycle of having open credit lines, borrowing money, and paying it back. It seems to me that it is like a dog chasing its’ tail: borrow money to improve my FICO score so I can borrow more money.

You could inherit $1M and your FICO score would not be affected. You could work very hard at your job and get that promotion making more money and it would not change your FICO score. You could finish that bachelor’s or master’s degree to get a better job with better pay and your FICO score would not be affected.

You could have $25K in an emergency fund and $300K in your 401K and $100K in mutual funds and your FICO score would not change. And you could own your home and 2 rental properties free and clear and your FICO score would not change.

So the FICO score is all about going into debt and staying into debt. Having a high FICO score means that you are very good at jumping through the hoops of going into debt.

And yes, I know that some insurance companies, landlords, and employers are starting to use the FICO score to determine the worthiness of applicants.

I personally think that’s the wrong element to measure. A low or inexistent FICO score could indicate a person that is not responsible with money.

But it could also represent someone who has no debt, has savings, investments, and has no need to borrow money.

If a company is not smart enough to realize that and look deeper into my financial situation, then maybe I don’t want to be in business with them.

Note: Here is some interesting insight on the use of the FICO score for renting from my fellow PF blogger Devin Czech.

Tale of the Tape: Net Worth

What is it? Your net worth is the difference between your assets (what you own) and your liabilities (what you owe).

Net Worth = Value of Assets – Total Liabilities

Why do you need it? Well, it is very simple. As you go through life your financial position is better when you have more assets that you own free clear and very little in liabilities.

Think about this. When you are 65, would you prefer to own your home free and clear or be facing retirement years still carrying a mortgage?

Would you like to have the freedom to choose when to stop working or having to work because you still need the money to service your debt?

The greater your net worth, the more options you have to do what you really want to do in life.

How can you improve it? You have to work to increase your assets and reduce or eliminate your liabilities. In his must read book, “Rich Dad, Poor Dad”, Robert Kiyosaki explains it this way:

“In financial reporting, reading numbers is looking for the plot, the story. The story of where the cash is flowing. In 80 percent of most families, the financial story is a story of working hard in an effort to get ahead. 

Not because they don’t make money. But because they spend their lives buying liabilities instead of assets.”

 So how do we do this? How do we put our focus on increasing our net worth?

  • Increasing your assets: Get on a budget (spend less than you make), save money for emergencies, invest for retirement and for college. Invest for wealth building in mutual funds and real estate.
  • Reducing your liabilities: Pay off your credit cards, car loans, student loans. Stop borrowing money. Pay off the mortgage early.

 

The Decision

Well, for me the decision is very clear. I am going to focus on improving my net worth and not worry about my FICO score. I will keep an eye on my credit report and check it at least once a year for accuracy.

The FICO score has a limited scope and it’s focused on the short term. And I don’t want to live my financial life using the crutch of debt.

I want to focus on the long term. And I can impact my net worth by taking charge of my finances. I can focus, take control of my money, and really influence my overall financial wellness.

In my mind, net worth is the clear winner in this fight. It is the true measure of winning with money.

Question: What do you think? What number will be your focus?

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