Mellody Hobson talks to listeners about cleaning up their finances on this week’s “Money Mondays.”
It’s time for some financial Spring cleaning?
That’s right. And I’m not talking about dusting your keyboard. Take a break from clearing the gutters and attacking all those bathroom nooks and crannies with a toothbrush and some bleach—It’s time to do some Spring cleaning of your finances.
Why is it so important?
A nationwide study conducted by LearnVest and Chase Blueprint found that about 50% of adults worry about money and 40% feel they lack control of their finances. That’s a lot of stress—and everyone is in a position to make it better. Taking stock of your finances is like purging your closet: An afternoon of hard work pays off. At the very least, it will help you get a handle on where you stand financially, giving you a better sense of control and a clearer vision about changes you need to make to reach your financial goals.
How do we go about doing it?
I suggest this five-step plan.
Step One: Check Your Credit
A Federal Trade Commission study of the U.S. credit reporting industry found that five percent of consumers had errors on one of their three major credit reports that could lead to them paying more for things like auto loans and insurance. Five percent doesn’t sound like much, but some studies quote as many as 70% of credit reports contain errors. It comes down to how you define “error.” Some things, like an incorrect address, will have no bearing on your score. Other things, like missed payments that never happened, could cause major trouble.
What kind of trouble? Higher interest rates and disqualification on loans and apartments, not to mention higher insurance premiums and in rare cases, even being disqualified for jobs.
This is why it’s so important to request a copy of your credit report from each of the 3 bureaus (Equifax, TransUnion, and Experian) on annualcreditreport.com. That is the only official site, so don’t fall for an impostor. If you’ve been denied credit, you can also get a free copy of your report from the bureau used by the lender who denied you. Should you find any errors on your reports, get to correcting them.
Step Two: Family Meeting
It’s important for couples to be on the same page about the family finances. That means getting out the necessary paperwork and disclosing the whole truth about where you stand: What do your retirement accounts look like? Are there any outstanding debts still hanging over your head? Are you staying on budget or do you need to make adjustments to either your spending habits or the amount budgeted for certain bills and expenses? Taking a hard look at your financial goals and your habits can help you stay on track, or right the ship if you’ve gone astray.
I think older children can be a part of this conversation too. For instance, is there a college-bound child who can begin researching student loan opportunities?
Step Three: De-Clutter
You know how Spring cleaning feels great because you actually know where to locate things that used to be haphazardly thrown in the all-encompassing junk drawer? The same goes for important financial documents. Where are they? After you’ve made your pile, start sorting it out, and then start shredding. Tax returns older than seven years can go (and that’s playing it super-safe), as can pay stubs and bank statements over a year old.
Next, make sure you have a designated area for important documents like wills and insurance policies. The trick here is for BOTH spouses to know how to easily find this information.
That takes us to Step Four: Insure Your Future
While you’re gathering information, take a careful look at insurance policies and see if you need to make any changes regarding coverage or beneficiaries. If you have a new family member, a new home or a new job, your insurance needs have likely changed. If you’re getting older, you may want to think about disability insurance or long-term care insurance. How about home and auto-insurance? Are you getting the best rates? Can you afford to raise your deductibles to save money on premiums?
Now we’re at Step Five: Fire at Will
Maybe you don’t have a full-fledged estate plan, but at the very least, you must have a will that clearly spells out your wishes. Fail to do this, and the state decides what happens to your assets regardless of your intentions or your family’s needs. The online legal services firm Rocket Lawyer recently conducted a survey that found that over 60% of Americans don’t have a will, with most people citing procrastination as the reason. What’s worse is that the study found that 70% of people with children younger than 18 don’t have a will, which means they have no designaIf you don’t have a will, get crackin, and if you do, make sure it’s still in line with your personal circumstances. Remember, you need the beneficiaries on your retirement plan and insurance policies to match those on your will. Otherwise, designations on those accounts trump anything you may specify in your will.
It’s time to roll up our sleeves and get to work!
