Spring is right around the corner! That means colorful flowers, chirping birds, sunny mornings, and of course spring cleaning. If winter and the holidays took a toll on your financial picture, it’s time to do some financial tidying. Below are six tips for spring cleaning your finances.
#1. Organize Your Budget
A budget is often unfairly treated as the thing preventing you from having what you want. On the contrary, a budget is the very thing that allows it! The great thing about budgeting is that you can tailor it to your own wants and needs. There are plenty of recommendations and “rules of thumb” telling you how much money you should spend on housing, food, and so on, but you can create your own budget that suits you. Maybe you love indulging in gourmet foods and splurging at lavish restaurants, and you don’t need much more than a closet-sized apartment to hold your belongings. In that case, you might budget for high food costs and low housing costs. The important thing is to live within your means, which means you don’t spend more money than you make, and that you stay organized so you know where your money is going.
#2. Clean Up Your Credit Score
Increasing your credit score has a major impact on your ability to borrow money. Even if you’re averse to getting into debt, there may be a time when borrowing is a necessity, or when it makes the most sense financially. By increasing your credit score, you may qualify for lower interest rates, which can save you tens of thousands of dollars in interest costs on a home mortgage. It also opens up your opportunities for borrowing since lenders may be willing to accept a lower down payment. A higher credit score shows lenders you are less of a risk.
Your FICO score is the credit score most lenders will use to determine your creditworthiness. FICO scores are calculated based on payment history, credit usage, length of credit history, new credit, and credit mix.
Payment history indicates how well you regularly make on-time payments. Therefore, be sure to make payments on time for all debts, even if you can only afford the minimum payment.
Credit usage shows how much credit you use compared to how much is available to you. Try to keep your credit usage to 30% of your limit or less to show you are not at risk for defaulting. You can also request higher credit limits if you are disciplined enough not to use more.
Length of credit history indicates how long your credit accounts have been active. Longer credit histories increase your credit score.
New credit refers to accounts recently opened, so be careful not to apply for too many credit cards or loans all at once or it could hurt your credit score.
Credit mix indicates the different types of credit you have such as credit cards, auto loans, and mortgages. Having more of a mix helps to increase your score.
#3. Clean Up Debt
Do you have a variety of debts you’re trying to pay off such as a mortgage, auto loan, credit cards, and student debt? That’s not necessarily a bad thing since credit mix is part of your FICO score calculation. But if you’re having trouble keeping track of payments, making deadlines, and developing a payment strategy, it’s time to clean up some of that debt.
Come up with a strategy for paying down debt. There are several simple strategies you can follow, such as paying off the highest balance first and working down from there, or starting with the highest-interest debt first. Whatever your strategy is, the important thing is to pay off debt as soon as possible. This reduces interest costs, frees up cash flow, and increases your ability to borrow with more favorable terms.
#4. Declutter Your Home
In a lot of ways, the state of your home can reflect the state of your money. People often ask: do wealthy people have clean homes because they have money, or do people become wealthy because they keep their homes clean? Either way, there is a distinct correlation between a tidy home and a tidy financial picture.
In your efforts to spring clean your finances, declutter your home and take steps to get things organized. Go through old mail and documents. Make sure there aren’t notices for late fees or recurring costs from something you no longer need. Donate items you don’t use regularly, or even sell off unneeded items and collect some cash while freeing up space in your home.
For many people, decluttering is an emotional process that involves reluctance to part with sentimental items. It certainly makes sense to have a few meaningful keepsakes, but when every item in the house is deemed sentimental, the battle is already lost. In her blog, Mrs. Frugalwoods says, “In many ways, it’s entirely possible to be owned by your stuff…We humans have a strange tendency to instill our belongings with far more respect that they deserve. We try to get stuff to serve as stand-ins for human emotions and we exalt material goods as more than their intended function…I’m fond of saying that time and money are our most precious resources and that we should fiercely guard how we use both of these. Owning too much stuff in a disorganized home is an easy way to expend way too much time and way too much money.”
#5. Clean Up Paperwork
If you’re like most Americans, chances are you have a filing cabinet full of important papers, or maybe even a pile of old mail that you’ll “get to later”. Cleaning up paperwork can be freeing and can create a lot of space. It’s especially important if there might be paperwork with deadlines for closed accounts, late fees, or canceled policies. But as you go through the paperwork, you’re likely to find a lot of things that are very outdated and that you no longer need. And the papers that are important should be digitized. It’s easy to digitize documents in the modern world where digitization is as simple as scanning a document with your iPhone to create a PDF.
If you keep all of your receipts for tax purposes or for personal records, consider using a financial tracking app that collects receipts, such as QuickBooks. This will give you a much more organized file of receipts without taking up physical space.
#6. Review Your Numbers
One of the best ways to clean up your finances is simply to know your numbers. It’s important to review your numbers at least once per year so you can update them as you experience life changes.
Tax withholding. Check your tax withholding and make sure it’s as accurate as possible. Did you get married or have a child? Did you start a side hustle? You might want to update your withholdings so you don’t owe too much in taxes from your side business.
401k contributions. Did any laws change that affect your contributions? Do you qualify for a higher match? Are you close enough to retirement to make catch-up contributions?
Insurance policies. Did you get a raise and need a bigger life insurance policy? Did you buy a new house and need to update your homeowners insurance? Do you expect to have medical expenses and want more health insurance coverage? There are so many types of insurance and so many changes that can affect your policies that it’s important to review your needs and coverage annually.
Credit score. Do you know your credit score? Has it changed in the past year? Do you know how to increase it?
Savings. Do you have a 3-6 month emergency fund? If you are saving for something specific, are you close to your goal? Do you need to make changes in your savings practices?
Goals. What were your financial goals for the past year? Did you achieve them? What are your goals for the next year?
The more you clean up your financial picture, the more control you will have over your money. Now is a great time to make changes! There’s no need to wait until the new year or until you start a new job. Tidy up your finances today and prepare yourself for a better financial future.
Find out how 101 Financial can help you budget better, build credit, and get out of debt.