How to Rebuild Your Finances

Divorce. Death of a spouse. Unemployment. Illness.

There could be a myriad of reasons that people find themselves rebuilding their finances. Most families are one or two paychecks away from being broke and in danger of financial ruin.

When a consumer finds themselves in this unenviable position, there are several steps that can be taken to quickly get back on sound financial ground.

First, a net worth statement is necessary to get a true picture of your finances. It is the most basic financial tool which is used to help make financial decisions and to measure progress. The calculations that are needed to determine your net worth is to first add all of your assets. These include your home value with its furnishings, automobile, balances in your bank, investment, retirement and savings accounts and other personal property.

Next determine your liabilities. This includes the outstanding balances on your mortgage and home equity loans, credit cards, auto loans and any other financial obligations. Subtract your total liabilities from your total assets. This figure is your family's net worth. It is highly suggested that you calculate your net worth at least once every year.

After you have figured your family's net worth, your next step should be to establish a budget. Determine all sources of income including salaries, social security or pension benefits, child support, alimony and interest earned. Next, calculate all fixed and flexible expenses. A fixed expense is the same every month, such as rent or mortgage and insurance payments.

Flexible expenses are food, dining out and recreational expenses. A lot of people have expenses that exceed their income and unfortunately use credit cards to pay off living expenses. This is a very dangerous practice and if it MUST be done, it should only be done short term.

Open your own savings and checking accounts, even if you're married. It is a vital first step in achieving financial independence and is particularly important if you are heading toward a separation or divorce.

I can't stress enough the importance of prompt bill paying. Your bill paying habits are reflected on your credit reports and it is a habit that will be reviewed by any future creditors. That is why it is extremely important to monitor your credit reports yearly. Eliminating any incorrect data from your credit report can increase your credit score significantly and can save you hundreds and even thousands of dollars.

The best way to establish good credit is to obtain a credit card. Be careful and read the entire disclosure, looking for all fee's, interest rates and penalties. If you are in the process of rebuilding your credit and finances, chances are that you will only be able to be approved for a credit card with a higher interest rate. An alternative might be getting a secured card, where your spending limit is equal to the balance you carry. After a year of prompt monthly payments, you may be able to negotiate with your bank for an unsecured credit card.

Learning from your mistakes, you need to set up an emergency fund to prepare for any unexpected financial setbacks. Figure out what your total monthly expenses are and set aside a portion of money until your emergency fund is equal to six months to a years worth of living expenses. It's not difficult once you get started.

Rebuilding your finances will require planning, discipline and hard work. Be patient. Your financial picture, bad or good, does not develop overnight. Seek the advice and counsel of professionals if you need to.