MONEY MANAGEMENT

A column on personal finance prepared by the Virginia Society of Certified Public Accountants

STARTING OVER: EIGHT STEPS FOR REBUILDING YOUR FINANCES

(September 23, 2003) – Perhaps you’re recently divorced or widowed. Maybe you just landed a job after a long period of unemployment or you recently completed bankruptcy proceedings. All of these life events present a common challenge: the need to reestablish yourself financially. The Virginia Society of CPAs outlines the following steps to land you on sound financial footing:

Prepare a Net Worth Statement

A net worth statement is a basic financial management tool used to make financial decisions and to measure progress. To determine your family’s financial net worth, add all your assets including: balances in any bank, investment, or retirement savings accounts; the value of your home and its furnishings; any real estate or automobiles you own; and personal property such as jewelry and antiques. Next, identify your liabilities. These might include outstanding balances on your mortgage and home equity loans, credit cards, automobile loans, student loans and other obligations. Subtract your liabilities from your assets to arrive at your family’s net worth. You should calculate your net worth once a year to identify significant changes.

Create a Budget

Identify sources of income, including your salary, social security or pension benefits, child support or alimony, and interest and dividends on your savings and investments. Next, list all your fixed and flexible expenses. Fixed expenses are the same every month. These include rent or mortgage payments, credit card payments, insurance premiums, and utility payments. Flexible expenses, like food, gifts, dining out, and recreation can be reduced or eliminated by tightening your belt. If your expenses exceed your income, you need to change one or both. Consider cutting some discretionary spending, taking on a second job, or moving to a less expensive area.

Open Bank Accounts in Your Name Alone

Open your own savings and checking accounts. This is particularly important if you are heading toward a separation or divorce. Having your own account will eliminate the possibility of your spouse writing bad checks or otherwise misusing the account. It is also a vital first step in achieving financial independence.

Pay all Your Bills on Time

Regardless of what is going on in your personal life, it is important that you pay your bills on time and balance your checkbook carefully. If you excessively bounce checks and pay finance charges, this may be reflected in your credit report.

Review Your Credit Report

It’s important that you monitor your credit report regularly for errors. Order a copy of your credit report from all three of the major credit bureaus: Equifax, 800-685-1111; Experian (formerly TRW), (888) EXPERIAN (397-3742); and Trans Union, 800-916-8800.

If your report contains information you believe is incorrect, contact the bureau and request that they investigate the error. If the dispute cannot be resolved, you have the right to submit a 100-word statement that tells your side of the story.

Get a Credit Card

The best way to establish good credit is to get a credit card. Depending on your credit history, this may or may not be an easy task. A secured credit card is an excellent way for someone with bad credit to build a good rating. With a secured card, you give the bank or credit card company a deposit and your card has a credit limit for the same amount. To establish a good credit history, you need to use the card and pay off the debt on a timely basis. CPAs suggest that you only charge what you can afford to pay back at the end of the month. A good strategy is to use credit for a specific purpose, such as buying gas for your car. After using the secured card and paying your bill regularly for a year, try to negotiate with the company for an unsecured card.

Establish an Emergency Fund

Setting up an emergency fund is the best way to prepare for any future financial setbacks. Consider the amount of money you need to pay your bills for housing, food, insurance, medical care, and other necessities for six months to a year. Then work at setting aside small amounts each month until you have an emergency fund equal to the amount you would need to cover six months to a year’s worth of living expenses. Resist the urge to tap into this money unless you are facing a real financial crisis.

Get Good Financial Advice

Rebuilding your financial life requires planning, hard work and discipline. If you can’t seem to manage on your own, enlist the help of nonprofit credit counseling services to implement your new budget and help you work with creditors to create a realistic repayment plan. A CPA can provide overall financial advice that can help you regain your financial footing.

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.