This is a post from Jenna Smith. Consideration was received for the editing and publishing of this post.
Spring cleaning isn’t just about decluttering your house and making everything all clean and sparkly. Spring cleaning is about taking stock of your life. It’s when you look at where you’ve been, where you are, and where you want to go. Yes, a lot of those ideas manifest in the clearing out of physical clutter, but it also manifests in other ways, like getting your finances back on track . . . or did you think that it was a coincidence that tax time happens in the spring?
Okay, well, it probably is a coincidence, but let’s pretend that it’s all part of a bigger system, okay? It’ll make this post more fun.
Starting Up: What Are You Bringing In?
The most eye popping number on your tax forms isn’t the amount that you owe or the amount you’re getting back. The most important number on your tax forms is your earned income. Trust us: now that you have that number, everything else gets a lot easier.
Step One: What Is Your Debt to Income Ratio?
The best place to start here is with your bills. Gather together all of your utility bills, your credit card bills, your car loan and mortgage bills and any other payments you might be making. This will give you a black and white evaluation of what you’re spending at a minimum each year. Divide that amount by the amount of money you brought in. This will give you your debt-to-income-ratio.
According to the Consumer Financial Protection Bureau, you want a debt-to-income ratio that is below 43%. If your debt-to-income ratio is higher than 43%, you are more likely to have problems paying your bills on time. If the amount you pay out every year is higher than the amount you’re bringing in, that means that you are living on credit. Living on credit never goes well.
Step Two: Lowering Your Debt to Income Ratio
First – don’t be ashamed if your debt to income ratio is higher than 43% or even if you’re living on credit. What’s important isn’t what you did last year. What is important is what you are going to do this year. There are a few different approaches that you can take to reducing the amount of money you pay out every month (and year):
1. Settle Your Debts.
Settling your debts is where you work with a creditor to come up with a lump sum payment that is less than the full amount you owe but that you pay all at once to declare your commitment fulfilled.
Sometimes you can do this yourself but it is usually better to work with a third party. Most creditors and debt holders prefer working with debt reduction specialists. They are also more likely to give you a better deal when you work with these companies and individuals than if you approach them on your own.
2. Adjust your payments.
Creditors and debtors want to keep your business. They would rather lower interest rates and forgive fees than have you close your account. Call them and ask them to work with you to make your debt repayment easier.
3. Live on the Cheap
Debts aren’t the only things eating up your annual income. Track your spending habits for a month or two and then evaluate: can you cut anything? There are lots of ways to live super frugally without having to give up the things you love. You just have to be creative.
Remember: the goal is to be in a better financial position next year than you are this year. Even if you can’t get debt-free within the next twelve months, some progress is better than none!