Financial Awareness month is over as of three weeks ago. I think one of the most important takeaways from last month is that everyone needs to get more familiar (read: aware) of their finances and financial situation.

What does this awareness require? You need to know your numbers, organize your debt and build a cushion, and fix your credit.

These are topics that are hammered at EVERY day by financial bloggers. But, for some reason there are still people that do not go through with this advice and find themselves in less than desirable circumstances.

Know Your Numbers

The absolute first thing you need to do is get your financial house in order. How do you do that? You learn about its foundation before anything else. That means that you need to know what exactly is coming in and going out each month. When you figure out what is going out, it is also best to figure out what portion of it is fixed and what portion is non-fixed (or variable).

• If you are just starting out: Go ahead and pull out your credit card and bank statements. Add up all of the numbers into categories that you see fit. After the exercise you will probably have a few larger categories like house mortgage or rent, utilities, car payments, groceries, etc. You will also have some smaller categories like cell phone bills, fast food expenditures, alcohol, etc. You should classify the expenses as both fixed and non-fixed. Your rent is the same every month, your fast food expenditures are not. You get the point… put each item into one of the two categories. For income you can classify it the same way. If your pay is salary based and constant, then record it as a fixed income. If your pay is hourly but you work, on average, x/hrs per week… you could even record that as a fixed salary. However, income from dividends and interest on accounts should be classified under investment income which, by its nature, is variable.
• If you already have something that tracks your budget: Open up your program or website of choice whether it be Mint, Yodlee, Wesabe, Quicken, Pear Budget, or other. Most likely everything I said above is already taken care of, so all you need to do is record what your average monthly expenditures on each category are.

Once you have all of that information, you want to come up with a planned budget. Write out all of the categories you have been spending money on over the past few months. Next to each one, write down a number that you expect to spend per month. Once again, for fixed expenses and income this should be easy. For non-fixed expenses and income, you want to place an average amount down with some room for comfort. You do not want to walk the line so close that you risk falling off!

For expenses that you only have to pay for once every few months, like car repairs, you want to take how much you have spent over the past year and divide it into an average per month. This number will dictate how much you should be saving each month in anticipation for those expenses that you will incur eventually. Next time you have a car repair you can use the cash you have saved for it rather than dipping into your emergency fund or swiping your credit card!

Organize Your Debt & Build a Cushion

Now that you have figured out your budget, make a list of all of your debts. Rank the debt from highest to lowest interest rate. You want to make a plan to start chipping away at these debts, starting with the highest on the list. Looking at your budget, how much is leftover when you take your revenue minus income? Of that, how much can you reasonably throw at the debt first on the list while paying the minimums on the rest? Keep in mind you want to have at least a 3 month emergency fund. So if you have no e-fund, you need to also fund that while paying off debt.

As you pay off debts you can start “snow-balling” the payments into the next debt down the list. When you are completely debt free, you can take all of your debt payments and start pumping it into savings.

I used the word snow-balling, but don’t get this confused with Dave Ramsey’s method. He advocates paying off the debts with the lowest amounts first. He looks at the psychology of the matter. Small victories make you feel better and continue fighting. That may be the best method for some… including you! However, when looking at dollars and cents, it makes the most sense to pay off highest interest debts first.

Take your pick, either the financially responsible or the psychologically rewarding method… either way, you are paying off your debt and that is a good thing. Man vs Debt actually posted a very good article recently detailing the “Debt Tsunami” which is worth checking out. It goes over debt repayment in much greater detail!

Fix Your Credit

I have previously discussed how detrimental bad credit is for all aspects of your life. Your credit is the way lenders gauge your credit worthiness. FICO scores range from 300 to 850. The lower the score, the more risk that is perceived. The more risk that is perceived, the higher interest you will pay.

You should definitely check your credit report and verify that everything is accurate. I posted all the steps you need to take to get a copy every four months as part of the government mandated free credit reports. Once you have taken all of the steps to ensure your credit report is accurate, what are some steps you can take to ensure you keep your credit score high?

• Make monthly payments on time.
• Aim to have long-term credit in your name (age of accounts is big, don’t cancel the credit cards you have held the longest!)
• Keep your balance owed to less than 35% of your credit limit.

For more information, visit one of the Credit Bureau’s websites at either Transunion, Equifax, or Experian.

Budgeting Makes Cents

It is worth it to budget.

The first time may take some effort and be a nuisance. But once you have a system in place you will find that you have better insight into how your finances work. You will find that “unplanned” expenses like car repairs are actually plannable to a degree. No longer will you need to swipe your card, you will just pay for those repairs in cash (or as I do, pay on credit and pay off in full the same month :)!).