Life is busy. Depending on your life stage, not only do you need to focus on your career, but you also have family, finances and building a future to consider. With such a full plate, it can be easy to focus on things you are knowledgeable about while allowing other things you feel less informed of to fall by the wayside. If you’re hoping those things will take care of themselves without your guidance or that they magically won’t matter since they’re off your radar, you could be in for a rude awakening.
Ignorance or avoidance might work for some things, but for many financial issues it’s simply not a solution. Knowledge is power; ignorance is weakness. Financial knowledge is power that once grasped and utilized, can help lead to wiser financial decisions that you can make to build a healthier financial life for yourself. It is easy to think that some of this financial knowledge is overwhelming or difficult to attain. The exact opposite is true; you just have to know where to access it. Following are three simple financial principles that are easy to grasp and use to increase your financial power.
Checking Your Credit
Knowing your credit history is essential to building a financially stable life. The key to knowing your credit history is accessing your credit report. Your credit report provides a wealth of information – including things like how much credit you have, how much money you owe to your creditors, how often you pay your bills on time, and other important financial facts.
Many believe your credit is only checked when applying for a loan. It is true that your creditor checks your credit report before extending a new line of credit, but it doesn’t stop there. Others who can check your credit report include:
– Potential employers
– Prospective landlords
– Insurance companies
– Any company you initiate doing business with
The beauty of checking your credit report is that the government allows you to request one for free once every 12 months per reporting agency. As there are three reporting agencies, you can access your credit report three times per year. If that’s not enough to convince you, consider the fact that one out of every five credit reports have errors. The only way to know whether your report has errors is by checking it regularly.
Knowing your cash flow is vital to staying on track financially. There are different ways to determine your cash flow, but the best and easiest way is to live by some sort of budget.
A budget, to many, sounds restrictive, but it doesn’t have to be. In fact, a budget can provide freedom – freedom to spend your money as you see fit and build the life you want. However, 61 percent of people surveyed in a recent poll do not live by a budget.
Starting a budget is quite simple. You begin by determining how much income you make each month. You then write down your recurring monthly expenses. The final piece is tracking your discretionary spending. The combination of those factors helps show you where your money is going each month.
There are online tools you can use to build a budget, or you can do a simple spreadsheet. You can also use an app like iQuantifi that helps you make purchase decisions based on your specific goals.
The final piece of knowledge that can increase your financial power is your debt-to-income (DTI) ratio. This might sound like a difficult equation to calculate, but it’s quite simple. It’s a percentage that looks at your monthly recurring debt versus your monthly gross income. So, for example, if your monthly obligations are $1,000 and your gross income is $4,000 you would calculate your DTI as shown below:
1,000/4,000 = .25 or 25% DTI
Knowing your DTI is just as important as accessing your credit report – especially if you’re in the market to buy a house. The higher your DTI is, the more concerning it is to lenders (especially mortgage lenders) as it indicates the amount of your income that is going to pay debt. That leaves the question as to how much you truly have left over to make your mortgage payments. In general, most mortgage lenders want to see a DTI, including mortgage and other obligations, of no higher than 36 percent. When simply looking at the mortgage, they want no higher than 28 percent. The major reasoning behind this is to make sure you’re a good loan candidate that can pay your mortgage bill.
With a little work, you can master these financial habits. Once you do, you’ll have power you can use to better your financial life.
By John Schmoll, Contributor