Starting Over: Eight Steps for Rebuilding Your Finances

Starting Over: Eight Steps for Rebuilding Your Finances

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 following steps can help get you back 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 & KNOW YOUR CREDIT SCORE

It is important to monitor your credit report and credit scores regularly to make sure all the information is correct. Every consumer is entitled to a free credit report every 12 months from each of the three credit bureaus. To get your free annual report, you can contact each of the three credit bureaus individually, or you can contact one centralized source that has been created for this purpose. Besides the annual report, you are also entitled to a free report under the following circumstances:

A company has taken adverse action against you, such as denying you credit, insurance, or employment (you must request a copy within 60 days of the adverse action)
You're unemployed and plan to look for a job within the next 60 days
You're on welfare
Your report is inaccurate because of fraud, including identity theft.

You can order your free annual report online at by calling 877-322-8228, or by completing an Annual Report Request Form and mailing it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

Alternatively, you can contact each of the three credit bureaus:

Experian National Consumer Assistance Center, P.O. Box 2104, Allen, TX 75013-2104, (888) 397-3742
Trans Union LLC, Consumer Disclosure Center, 1000, Chester, PA 19022, (800) 916-8800
Equifax, Inc., P.O. Box 740241, Atlanta, GA 30374, (800) 685-1111

If you make your request online, you should get access to your report immediately. If you request your report by phone or mail, you should receive it within 15 days.

What is a credit score?

A credit score is a number that predicts your creditworthiness, how likely you are to pay back a loan. Most scores range from 300-850. Your credit score starts with the information about you from your credit report. That is why it is essential to make sure your credit report is correct. Unlike your credit report, which you can get at no cost, you usually have to pay for your credit score.

Under federal and some state laws, you have a right to dispute incorrect or misleading information on your credit report. Typically, you'll receive with your report either a form to complete or a telephone number to call about the information that you wish to dispute. Once the credit bureau receives your request, it generally has 30 days to complete a reinvestigation by checking any item you dispute with the party that submitted it.

You have the right to add to your credit report a statement of 100 words or less that explains your side of the story with respect to any disputed but unchanged information. A summary of your statement will go out with every copy of your credit report in the future, and you can have the statement sent to anyone who has gotten your credit report in the past six months. Unfortunately, though, this may not help you much--creditors often ignore or dismiss these statements.

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.