how to calculate an amount to be financed

How to Calculate an Amount to Be Financed.

The full price of a major purchase such as a house, boat or car is rarely financed. Most lenders for these types of loans require a down payment of some sort, usually expressed as a percentage. Additionally, mortgage loans list a different figure, "amount financed," which does not include prepaid fees paid to the lender. Knowing how to calculate an amount to be financed will help you make informed consumer decisions.



Part 1 Calculating a Commercial Loan Amount to be Financed.

1. Determine the selling price. For a vehicle, boat, or another type of commercial loan purchase this will be the amount you agree to pay for your new acquisition. It does not include other aspects of the deal such as the trade-in allowance, fees, taxes, and other closing costs.

2. Subtract any net trade-in allowance. For auto or boat purchases, among others, a dealer may offer a trade-in allowance or credit for giving them your old car or boat when you buy a new one. The value of this item, or a credit provided by the dealer, is then subtracted from what you owe on your new purchase. The net trade-in allowance is found by subtracting the amount still owed on your trade from the trade-in allowance offered by the dealership.

If the trade-in is high enough, dealers don't typically require an extra payment, such as a down payment.

Some dealers may allow you to use the trade-in value of your old vehicle to cover the required down payment on a new one (assuming the old one holds enough value).

3. Account for any cash rebates that are applied to the purchase price of the item. Dealers may also offer cash rebates as a way to incentivize purchases. These cash rebates are simply subtracted from the purchase price at closing. They also do not need to be included in the amount to be financed. Rebates may be provided to certain buyers, like students or military veterans, or may be specific to certain vehicles.

4. Settle on a loan amount. The amount left after rebates and trade-ins is the the amount owed. This amount must be either paid in full or borrowed from a lender and paid off in installments over time. From here, you can calculate the down payment if the lender requires one. For example, a lender might require 10 or 20 percent down on your purchase. Your loan amount is then the amount remaining after the down payment is subtracted out.

5. Use the loan amount as your amount financed. "Amount financed" is a term that is specific to home loans. All other loans simply refer to the amount financed as the total amount of the loan provided to the borrower. For these types of loans, simply use the loan amount after the down payment as calculated in this part as your amount financed.



Part 2 Determining the Amount Financed for a Mortgage Loan.

1. Negotiate a price for the asset with the seller. For a home, this will be your accepted offer price. For example, you might talk a homeowner down to selling a property for $100,000.

2. Subtract any deposits. Home purchases may have required a "good faith" deposit. Other purchases may also require a deposit be made while bidding on or reserving the item. This deposit is typically paid upon submission of an offer to purchase. This money is then subtracted from the purchase price, as you have already paid it.

Deposits are either returned (depending upon terms) or converted into the down payment amount and/or closing costs.

For example, if you put in a $3,000 good faith deposit on a $100,000 home, you would subtract this from the $100,000 to get $97,000.

3. Finalize the loan amount. The portion of the original purchase price remaining after these deductions is your loan amount, assuming you are planning on financing the purchase. This amount must be borrowed from a lender and then repaid over a period of time per a loan agreement. The loan amount is the amount borrowed from the lender, not the amount that will eventually be repaid in total, which also includes interest expenses.

4. Deduct the down payment amount. The down payment is paid in full upon closing the sale. It is generally a percentage of the total purchase price and is designed to provide security for the lender in the event of default. Therefore, it is not included in the amount financed.

Many mortgage lenders require 20 percent down on a real estate transaction, although you may be able to secure an FHA-backed mortgage requiring as little as 5 percent down payment. A lower loan balance results in less interest expense and the possible requirement of mortgage insurance.

A lower downpayment is expected on government- guaranteed loans such as FHA or VA because the lender has recourse to the Federal government in the event of default.

For example, if you paid a 20 percent down payment on the $100,000 house purchase, which would be $20,000, you would subtract this from your total.

Your good faith deposit may be applied towards your down payment. This means that the loan amount would still be the purchase price minus the down payment, which is $80,000 in this case.

5. Understand how amount financed differs from the loan amount. "Amount financed" is a term set by the 1968 Truth in Lending Act to describe how much credit is provided to a borrower when they take out a home loan. It is calculated by subtracting prepaid fees and finance charges from the loan amount, since these fees are paid at closing simultaneously with the execution of the loan documents. This means that the amount financed is always less than the actual loan amount. The amount financed is provided to borrowers on the Truth in Lending Disclosure Statement, which is supplied after you apply for a home loan.

6. Add up prepaid fees. Prepaid fees are subtracted from the loan amount to arrive at the amount financed. These fees include prepaid points, homeowners association fees, mortgage insurance, and escrow company fees. They also include lender fees like underwriting fees, tax service, process fees, and prepaid interest. Add all of these fees up to arrive a total prepaid fees amount.

7. Subtract total prepaid fees from the loan amount. Subtract all of the prepaid fees from the loan amount to get your amount financed. This information will also be available on your Truth in Lending Disclosure Statement.[9]



Part 3 Using the Amount Financed.

1. Compare different lenders. If you have the amount financed for a mortgage loan, you can use this information to compare different lenders by looking at the associated fees and interest rates. This information is provided on the Truth in Lending Disclosure Statement, which is provided by all lenders to loan applicants. If you instead are financing another purchase, you can use your amount of financing required to apply to a variety of loans and look for the best combination of fees and interest rate.

2. Calculate the amount of interest you will pay. Your loan will likely be charged compound interest as you pay it off. Compound interest paid increases with the loan duration, the interest rate, and the compounding frequency (how often the compound interest is calculated each year). When you have the amount financed, you can use online interest calculators to determine how much interest you will pay on loans with different loan terms. A longer, higher-interest loan will end up costing you much more money in the long run than a shorter-term, low-interest loan.

For more information, see how to calculate interest payments.

3. Calculate loan payments. If you know how much you need to borrower (your loan amount), you can use this information to check for loan rates online. Check loan aggregator sites to find interest rates for the type and size of loan that you need. Then, input this information into an online loan calculator to figure out what your monthly payments might be. The Financial Industry Regulatory Authority (FINRA) provides a good calculator at http://apps.finra.org/Calcs/1/Loan.

4. Assess your ability to afford a purchase. Once you have an idea of the monthly loan payments, you can use this information to figure out how much you can afford to take out in a loan. Assess your ability to afford the loan by starting with your monthly after-tax income. Then, subtract any existing debt payments (mortgage, auto, etc.), monthly expenses like utilities and food, and savings or contributions to an emergency fund. The amount left is money that you can afford to pay towards a new loan's monthly payment.

Most financial planners suggest limiting house payments plus taxes and insurance to 25 to 28 percent of take-home income.

For example, if your household net income is $7,000 per month, your total outlay for housing should be no more than $1,960 per month.

5. Determine mortgage APR. Your actual mortgage annual percentage rate (APR) is calculated using your amount financed, rather than the loan amount. That is, your actual APR will be higher than the interest rate listed on your loan. To calculate your actual APR, find your monthly payment by using your stated interest rate, loan term, and loan amount and entering them into a loan calculator. Then, record your monthly payment and find a loan calculator that allows you to input your monthly payment, loan duration, and loan amount and receive an interest rate as the output. The output will be your actual APR.

A good calculator for this purpose can be found at http://www.thecalculatorsite.com/finance/calculators/interest-rate-calculator.php.



Question : Gomez family has just purchased a $2,574.54 microcomputer. They made a down payment of $574.54. Through the store's installemnt plan, they have agreed to pay $121.00 per month for the next 18 months. What is the amount financed?

Answer : The amount financed is the portion of the purchase price paid for by the installment plan. In this case, it is the $2,574.54 (purchase price) - $574.54 (the down payment), which is $2,000. The amount to be financed does not include the interest paid during the plan, which will be $178.

Question : Selling Price: $258,900. Loan term: 30 months on 5.25% interest rate. Down payment: $64,7325. What will be the amount to be financed?

Answer : You will be financing the selling price plus any fees, minus the down payment.



Tips.

When shopping for real estate, be sure that your price range reflects your planned amount financed. You may be able to afford more or less, depending upon your savings and the amount of a down payment.

Warnings.

The purchase agreement used by many car dealerships is notoriously complicated and confusing. Be certain that you understand every line item in the agreement before signing it when buying a new or used vehicle.

February 10, 2020

How to Calculate an Amount to Be Financed

How to Calculate an Amount to Be Financed.

The full price of a major purchase such as a house, boat or car is rarely financed. Most lenders for these types of loans require a down payment of some sort, usually expressed as a percentage. Additionally, mortgage loans list a different figure, "amount financed," which does not include prepaid fees paid to the lender. Knowing how to calculate an amount to be financed will help you make informed consumer decisions.



Part 1 Calculating a Commercial Loan Amount to be Financed.

1. Determine the selling price. For a vehicle, boat, or another type of commercial loan purchase this will be the amount you agree to pay for your new acquisition. It does not include other aspects of the deal such as the trade-in allowance, fees, taxes, and other closing costs.

2. Subtract any net trade-in allowance. For auto or boat purchases, among others, a dealer may offer a trade-in allowance or credit for giving them your old car or boat when you buy a new one. The value of this item, or a credit provided by the dealer, is then subtracted from what you owe on your new purchase. The net trade-in allowance is found by subtracting the amount still owed on your trade from the trade-in allowance offered by the dealership.

If the trade-in is high enough, dealers don't typically require an extra payment, such as a down payment.

Some dealers may allow you to use the trade-in value of your old vehicle to cover the required down payment on a new one (assuming the old one holds enough value).

3. Account for any cash rebates that are applied to the purchase price of the item. Dealers may also offer cash rebates as a way to incentivize purchases. These cash rebates are simply subtracted from the purchase price at closing. They also do not need to be included in the amount to be financed. Rebates may be provided to certain buyers, like students or military veterans, or may be specific to certain vehicles.

4. Settle on a loan amount. The amount left after rebates and trade-ins is the the amount owed. This amount must be either paid in full or borrowed from a lender and paid off in installments over time. From here, you can calculate the down payment if the lender requires one. For example, a lender might require 10 or 20 percent down on your purchase. Your loan amount is then the amount remaining after the down payment is subtracted out.

5. Use the loan amount as your amount financed. "Amount financed" is a term that is specific to home loans. All other loans simply refer to the amount financed as the total amount of the loan provided to the borrower. For these types of loans, simply use the loan amount after the down payment as calculated in this part as your amount financed.



Part 2 Determining the Amount Financed for a Mortgage Loan.

1. Negotiate a price for the asset with the seller. For a home, this will be your accepted offer price. For example, you might talk a homeowner down to selling a property for $100,000.

2. Subtract any deposits. Home purchases may have required a "good faith" deposit. Other purchases may also require a deposit be made while bidding on or reserving the item. This deposit is typically paid upon submission of an offer to purchase. This money is then subtracted from the purchase price, as you have already paid it.

Deposits are either returned (depending upon terms) or converted into the down payment amount and/or closing costs.

For example, if you put in a $3,000 good faith deposit on a $100,000 home, you would subtract this from the $100,000 to get $97,000.

3. Finalize the loan amount. The portion of the original purchase price remaining after these deductions is your loan amount, assuming you are planning on financing the purchase. This amount must be borrowed from a lender and then repaid over a period of time per a loan agreement. The loan amount is the amount borrowed from the lender, not the amount that will eventually be repaid in total, which also includes interest expenses.

4. Deduct the down payment amount. The down payment is paid in full upon closing the sale. It is generally a percentage of the total purchase price and is designed to provide security for the lender in the event of default. Therefore, it is not included in the amount financed.

Many mortgage lenders require 20 percent down on a real estate transaction, although you may be able to secure an FHA-backed mortgage requiring as little as 5 percent down payment. A lower loan balance results in less interest expense and the possible requirement of mortgage insurance.

A lower downpayment is expected on government- guaranteed loans such as FHA or VA because the lender has recourse to the Federal government in the event of default.

For example, if you paid a 20 percent down payment on the $100,000 house purchase, which would be $20,000, you would subtract this from your total.

Your good faith deposit may be applied towards your down payment. This means that the loan amount would still be the purchase price minus the down payment, which is $80,000 in this case.

5. Understand how amount financed differs from the loan amount. "Amount financed" is a term set by the 1968 Truth in Lending Act to describe how much credit is provided to a borrower when they take out a home loan. It is calculated by subtracting prepaid fees and finance charges from the loan amount, since these fees are paid at closing simultaneously with the execution of the loan documents. This means that the amount financed is always less than the actual loan amount. The amount financed is provided to borrowers on the Truth in Lending Disclosure Statement, which is supplied after you apply for a home loan.

6. Add up prepaid fees. Prepaid fees are subtracted from the loan amount to arrive at the amount financed. These fees include prepaid points, homeowners association fees, mortgage insurance, and escrow company fees. They also include lender fees like underwriting fees, tax service, process fees, and prepaid interest. Add all of these fees up to arrive a total prepaid fees amount.

7. Subtract total prepaid fees from the loan amount. Subtract all of the prepaid fees from the loan amount to get your amount financed. This information will also be available on your Truth in Lending Disclosure Statement.[9]



Part 3 Using the Amount Financed.

1. Compare different lenders. If you have the amount financed for a mortgage loan, you can use this information to compare different lenders by looking at the associated fees and interest rates. This information is provided on the Truth in Lending Disclosure Statement, which is provided by all lenders to loan applicants. If you instead are financing another purchase, you can use your amount of financing required to apply to a variety of loans and look for the best combination of fees and interest rate.

2. Calculate the amount of interest you will pay. Your loan will likely be charged compound interest as you pay it off. Compound interest paid increases with the loan duration, the interest rate, and the compounding frequency (how often the compound interest is calculated each year). When you have the amount financed, you can use online interest calculators to determine how much interest you will pay on loans with different loan terms. A longer, higher-interest loan will end up costing you much more money in the long run than a shorter-term, low-interest loan.

For more information, see how to calculate interest payments.

3. Calculate loan payments. If you know how much you need to borrower (your loan amount), you can use this information to check for loan rates online. Check loan aggregator sites to find interest rates for the type and size of loan that you need. Then, input this information into an online loan calculator to figure out what your monthly payments might be. The Financial Industry Regulatory Authority (FINRA) provides a good calculator at http://apps.finra.org/Calcs/1/Loan.

4. Assess your ability to afford a purchase. Once you have an idea of the monthly loan payments, you can use this information to figure out how much you can afford to take out in a loan. Assess your ability to afford the loan by starting with your monthly after-tax income. Then, subtract any existing debt payments (mortgage, auto, etc.), monthly expenses like utilities and food, and savings or contributions to an emergency fund. The amount left is money that you can afford to pay towards a new loan's monthly payment.

Most financial planners suggest limiting house payments plus taxes and insurance to 25 to 28 percent of take-home income.

For example, if your household net income is $7,000 per month, your total outlay for housing should be no more than $1,960 per month.

5. Determine mortgage APR. Your actual mortgage annual percentage rate (APR) is calculated using your amount financed, rather than the loan amount. That is, your actual APR will be higher than the interest rate listed on your loan. To calculate your actual APR, find your monthly payment by using your stated interest rate, loan term, and loan amount and entering them into a loan calculator. Then, record your monthly payment and find a loan calculator that allows you to input your monthly payment, loan duration, and loan amount and receive an interest rate as the output. The output will be your actual APR.

A good calculator for this purpose can be found at http://www.thecalculatorsite.com/finance/calculators/interest-rate-calculator.php.



Question : Gomez family has just purchased a $2,574.54 microcomputer. They made a down payment of $574.54. Through the store's installemnt plan, they have agreed to pay $121.00 per month for the next 18 months. What is the amount financed?

Answer : The amount financed is the portion of the purchase price paid for by the installment plan. In this case, it is the $2,574.54 (purchase price) - $574.54 (the down payment), which is $2,000. The amount to be financed does not include the interest paid during the plan, which will be $178.

Question : Selling Price: $258,900. Loan term: 30 months on 5.25% interest rate. Down payment: $64,7325. What will be the amount to be financed?

Answer : You will be financing the selling price plus any fees, minus the down payment.



Tips.

When shopping for real estate, be sure that your price range reflects your planned amount financed. You may be able to afford more or less, depending upon your savings and the amount of a down payment.

Warnings.

The purchase agreement used by many car dealerships is notoriously complicated and confusing. Be certain that you understand every line item in the agreement before signing it when buying a new or used vehicle.

February 10, 2020

how to analyze your current finances

How to Analyze Your Current Finances.

Before you can improve your financial health, you need to analyze your current finances. Keep track of your expenses for a month and look at where you are spending the most. Use extra money to pay down debts, build an emergency fund, and save for your retirement. Although saving might seem difficult, it’s actually quite easy once you find out where your money is going.

Part 1 Tracking Your Spending.

1. Record your spending. Record all purchases that you make in a month. Write down the amount spent, the day, and the time. Some of the more popular methods include:

Create a spreadsheet. Remember to enter every purchase or expense. You should probably hold onto receipts so that you don’t forget how much you spent during the day.

Keep a notebook. This is a lower-tech option, but it is convenient. Carry your notebook around with you and record purchases as soon as you make them.

Use checks. This is an old-fashioned option, but you can easily track your expenses when your monthly bank statement arrives.

Use an app. Many apps are on the market that help track your spending on your smartphone. The most popular include Mint.com and Wesabe.com.

2. Add up your fixed expenses. Your fixed expenses don’t change month to month. Common fixed expenses include the following: Rent or mortgage, Insurance, Car payment, Utilities, Debt repayment.

3. Look closer at your discretionary spending. Your discretionary spending is any spending that isn’t fixed. Instead, it goes up and down each month. Pay attention to what you are spending money on. Break out the amounts spent on the following: Groceries, Eating out, Gas, Clothes, Hobbies/entertainment.

4. Pay attention to when you spend the most. Look at the days and times when you make most of your discretionary purchases. Do you buy impulsively immediately after work? Do you spend too much money on the weekends?

You might need to change your routine, depending on when you spend. For example, instead of pulling into the mall on your way home from work, you can change your route so that you don’t pass the mall.

If you’re a weekend spender, you can try to fill your time with other hobbies, such as exercise or visiting friends.

5. Compare your spending to the 50-20-30 rule. According to this rule, your monthly expenses should shake out this way: 50% should go to essentials, such as food, rent, and transportation. 20% should go to saving and debt reduction, and 30% should go for discretionary spending.

The 50-20-30 rule probably won’t work for many people. For example, your fixed expenses like rent might eat up more than 50% of your budget. If you have debts, then you might need to spend more than 20% to pay them down. Nevertheless, the 50-20-30 rule can help you identify where you are falling short. It also gives you something to work towards. If necessary, reduce your debt load by refinancing or paying down debts.

Part 2 Looking Closer at Your Debts.

1. Draw up a list of your debts. Go through your paperwork and find information on your debts, then draw up a list including the following: Name of the account, Total current balance, Monthly payment, Interest rate.

2. Pull a copy of your credit report. You might not remember all of your debts, so you should go through your credit report to make sure you haven’t forgotten anything. In the U.S., you are entitled to one free credit report annually from each of the three national credit reporting agencies. Don’t order the report from each agency. Instead, order them all by calling 1-877-322-8228.

You can also visit annualcreditreport.com. Provide your name, date of birth, address, and Social Security Number.

3. Check if you can reduce your debt load. Depending on your situation, you might be able to lower the overall amount you pay on your debts. Although this might not lower your monthly payments, you will ultimately save money in the long-term. Consider your options:

You might be able to refinance a 30-year mortgage into a 15-year mortgage. This will probably increase your monthly payments, but you can save big on interest.

Call up your credit card companies and ask for a better interest rate. This will lower your monthly payment and your overall debt.

Consolidate debt. For example, you can transfer credit card debts to a balance transfer credit card, or you can take out a lower-interest personal loan to pay off debts.

4. Find ways to reduce your monthly debt payment. In a cash crunch, you’ll need to reduce how much you pay each month, even if you end up paying more over the long-term. You can lower your monthly debt payments in the following ways:

You might be able to stretch out the length of the loan. For example, you might refinance a car loan and stretch out the repayment period to six years.

If you have student loans, you can ask for deferment or forbearance. These options temporarily suspend your payments, though interest will continue to accrue with forbearance. When you get back on your feet, you can begin making payments.

Debt consolidation can also reduce your monthly payments, depending on the interest rate and repayment period.

5. Pay off your debts. You need to pay back your debts, preferably sooner rather than later. Some of the more popular approaches to debt reduction include the following:

Debt avalanche. You pay the minimum on all debts except the one with the highest interest rate, to which you dedicate all extra money. Once that debt is paid off, you commit all resources to the debt with the next highest interest rate.

Debt snowball. With this method, you pay the minimum on all debts except the smallest one. You devote all available money to this debt until it is paid off, then you focus on the remaining debt that is the smallest. This method can give you momentum as you see your smallest debts disappear.

Debt snowflake. You look for ways to save money every day and make multiple payments each month to your debts. You can combine the debt snowflake method with either the avalanche or snowball method.

Part 3 Reducing Your Expenses.

1. Set a savings goal. Ideally, you should save 15-25% of your monthly paycheck. This means that if you bring home $2,000 a month, you should save between $300 and $500. That might not be a realistic goal right now, depending on your expenses.

If you can’t save 15%, then work on ways to reduce your discretionary spending. Every little bit helps, and there are many ways to save every day.

2. Reduce your spending on food. Stop eating out and instead cook at home. Buy a cheap cook book and have fun making new recipes. Remember to buy groceries in bulk for extra savings.

Clipping coupons will help reduce the amount you spend each week. Find coupons in your local newspaper or in the circular at the grocery store.

Use popular apps such as Checkout 51, Grocery IQ, and Coupons.com.

3. Find cheap entertainment substitutes. Everyone needs to unwind a little bit. However, you can usually find a cheaper substitute for your favorite activity:

Instead of paying for a gym membership, exercise outdoors. Join a jogging or walking group, or do pushups or sit-ups in the park.

Get your library card and check out books and DVDs instead of paying for them.

Instead of joining friends for happy hour, host a potluck at your house. Ask all guests to bring a dish or a bottle of wine.

4. Cut your electricity use. Install LED lightbulbs, which are four times as energy efficient as regular lightbulbs, and remember to unplug electrical devices when you aren’t using them.

You might also weatherize and insulate your home for increased savings. Obtain a home energy audit and apply for any local government programs. An energy audit can reduce your energy expenses by 5-30%.

5. Reduce your fixed expenses. These can be the hardest to reduce because they often require that you make big lifestyle changes. However, consider whether you can make any of the following changes, especially if you are living beyond your means:

Move in with friends or family. If you can’t afford your rent or home, then you might need to crash at someone’s place, at least temporarily. This can save a lot of money.

Take public transportation. Sell your car and pocket the money. You’ll also save on insurance and gas.

Get cheaper insurance. You can lower your auto or homeowners insurance by shopping around using an online aggregator. When you find a cheaper option, call up your current insurer and ask them to match it. If they won’t, you can switch.

6. Freeze your credit cards. Reduce the temptation to spend by freezing your cards in ice and carrying only cash on you. If you’re afraid of carrying cash, get a secured credit card or reloadable debit card.

Part 4 Saving for the Future.

1. Build a cash cushion. If your car broke down or you lost your job, could you continue to pay the bills? Build a cash cushion by saving six months’ worth of expenses. Start small, by putting aside whatever extra money you can spare.

Don’t let debt repayment get in the way. Most financial experts recommend that you build up at least a small emergency fund at first—say, three months. Then you can tackle your credit card debt.

Ideally, you can do both at the same time—contribute some money to your emergency fund and some extra to paying debts down quickly.

2. Contact Human Resources about retirement plans. You might be surprised that your employer offers a retirement plan. Call up HR and ask. Also check whether or not they will match any of your contributions.

For example, some employers might match up to 4% of your base salary. This means you contribute 4% and they contribute 4%. If you only contribute 3%, then they will match that.

3. Research IRAs. If your employer doesn’t offer a retirement plan, don’t worry! You have plenty of options to choose from. The two most common are Individual Retirement Accounts (IRAs) and Roth IRAs. You can open an account with many online brokers. Choose which IRA works for you:

IRA. With a traditional IRA, your contributions are tax-free. This is a good choice if you anticipate being in a lower income tax bracket when you retire.

Roth IRA. The big advantage of a Roth IRA is that your withdrawals will be tax free. However, you pay taxes on your contributions. This is a good option if you anticipate being in a higher income tax bracket when you retire.

January 27, 2020

How to Analyze Your Current Finances

How to Analyze Your Current Finances.

Before you can improve your financial health, you need to analyze your current finances. Keep track of your expenses for a month and look at where you are spending the most. Use extra money to pay down debts, build an emergency fund, and save for your retirement. Although saving might seem difficult, it’s actually quite easy once you find out where your money is going.

Part 1 Tracking Your Spending.

1. Record your spending. Record all purchases that you make in a month. Write down the amount spent, the day, and the time. Some of the more popular methods include:

Create a spreadsheet. Remember to enter every purchase or expense. You should probably hold onto receipts so that you don’t forget how much you spent during the day.

Keep a notebook. This is a lower-tech option, but it is convenient. Carry your notebook around with you and record purchases as soon as you make them.

Use checks. This is an old-fashioned option, but you can easily track your expenses when your monthly bank statement arrives.

Use an app. Many apps are on the market that help track your spending on your smartphone. The most popular include Mint.com and Wesabe.com.

2. Add up your fixed expenses. Your fixed expenses don’t change month to month. Common fixed expenses include the following: Rent or mortgage, Insurance, Car payment, Utilities, Debt repayment.

3. Look closer at your discretionary spending. Your discretionary spending is any spending that isn’t fixed. Instead, it goes up and down each month. Pay attention to what you are spending money on. Break out the amounts spent on the following: Groceries, Eating out, Gas, Clothes, Hobbies/entertainment.

4. Pay attention to when you spend the most. Look at the days and times when you make most of your discretionary purchases. Do you buy impulsively immediately after work? Do you spend too much money on the weekends?

You might need to change your routine, depending on when you spend. For example, instead of pulling into the mall on your way home from work, you can change your route so that you don’t pass the mall.

If you’re a weekend spender, you can try to fill your time with other hobbies, such as exercise or visiting friends.

5. Compare your spending to the 50-20-30 rule. According to this rule, your monthly expenses should shake out this way: 50% should go to essentials, such as food, rent, and transportation. 20% should go to saving and debt reduction, and 30% should go for discretionary spending.

The 50-20-30 rule probably won’t work for many people. For example, your fixed expenses like rent might eat up more than 50% of your budget. If you have debts, then you might need to spend more than 20% to pay them down. Nevertheless, the 50-20-30 rule can help you identify where you are falling short. It also gives you something to work towards. If necessary, reduce your debt load by refinancing or paying down debts.

Part 2 Looking Closer at Your Debts.

1. Draw up a list of your debts. Go through your paperwork and find information on your debts, then draw up a list including the following: Name of the account, Total current balance, Monthly payment, Interest rate.

2. Pull a copy of your credit report. You might not remember all of your debts, so you should go through your credit report to make sure you haven’t forgotten anything. In the U.S., you are entitled to one free credit report annually from each of the three national credit reporting agencies. Don’t order the report from each agency. Instead, order them all by calling 1-877-322-8228.

You can also visit annualcreditreport.com. Provide your name, date of birth, address, and Social Security Number.

3. Check if you can reduce your debt load. Depending on your situation, you might be able to lower the overall amount you pay on your debts. Although this might not lower your monthly payments, you will ultimately save money in the long-term. Consider your options:

You might be able to refinance a 30-year mortgage into a 15-year mortgage. This will probably increase your monthly payments, but you can save big on interest.

Call up your credit card companies and ask for a better interest rate. This will lower your monthly payment and your overall debt.

Consolidate debt. For example, you can transfer credit card debts to a balance transfer credit card, or you can take out a lower-interest personal loan to pay off debts.

4. Find ways to reduce your monthly debt payment. In a cash crunch, you’ll need to reduce how much you pay each month, even if you end up paying more over the long-term. You can lower your monthly debt payments in the following ways:

You might be able to stretch out the length of the loan. For example, you might refinance a car loan and stretch out the repayment period to six years.

If you have student loans, you can ask for deferment or forbearance. These options temporarily suspend your payments, though interest will continue to accrue with forbearance. When you get back on your feet, you can begin making payments.

Debt consolidation can also reduce your monthly payments, depending on the interest rate and repayment period.

5. Pay off your debts. You need to pay back your debts, preferably sooner rather than later. Some of the more popular approaches to debt reduction include the following:

Debt avalanche. You pay the minimum on all debts except the one with the highest interest rate, to which you dedicate all extra money. Once that debt is paid off, you commit all resources to the debt with the next highest interest rate.

Debt snowball. With this method, you pay the minimum on all debts except the smallest one. You devote all available money to this debt until it is paid off, then you focus on the remaining debt that is the smallest. This method can give you momentum as you see your smallest debts disappear.

Debt snowflake. You look for ways to save money every day and make multiple payments each month to your debts. You can combine the debt snowflake method with either the avalanche or snowball method.

Part 3 Reducing Your Expenses.

1. Set a savings goal. Ideally, you should save 15-25% of your monthly paycheck. This means that if you bring home $2,000 a month, you should save between $300 and $500. That might not be a realistic goal right now, depending on your expenses.

If you can’t save 15%, then work on ways to reduce your discretionary spending. Every little bit helps, and there are many ways to save every day.

2. Reduce your spending on food. Stop eating out and instead cook at home. Buy a cheap cook book and have fun making new recipes. Remember to buy groceries in bulk for extra savings.

Clipping coupons will help reduce the amount you spend each week. Find coupons in your local newspaper or in the circular at the grocery store.

Use popular apps such as Checkout 51, Grocery IQ, and Coupons.com.

3. Find cheap entertainment substitutes. Everyone needs to unwind a little bit. However, you can usually find a cheaper substitute for your favorite activity:

Instead of paying for a gym membership, exercise outdoors. Join a jogging or walking group, or do pushups or sit-ups in the park.

Get your library card and check out books and DVDs instead of paying for them.

Instead of joining friends for happy hour, host a potluck at your house. Ask all guests to bring a dish or a bottle of wine.

4. Cut your electricity use. Install LED lightbulbs, which are four times as energy efficient as regular lightbulbs, and remember to unplug electrical devices when you aren’t using them.

You might also weatherize and insulate your home for increased savings. Obtain a home energy audit and apply for any local government programs. An energy audit can reduce your energy expenses by 5-30%.

5. Reduce your fixed expenses. These can be the hardest to reduce because they often require that you make big lifestyle changes. However, consider whether you can make any of the following changes, especially if you are living beyond your means:

Move in with friends or family. If you can’t afford your rent or home, then you might need to crash at someone’s place, at least temporarily. This can save a lot of money.

Take public transportation. Sell your car and pocket the money. You’ll also save on insurance and gas.

Get cheaper insurance. You can lower your auto or homeowners insurance by shopping around using an online aggregator. When you find a cheaper option, call up your current insurer and ask them to match it. If they won’t, you can switch.

6. Freeze your credit cards. Reduce the temptation to spend by freezing your cards in ice and carrying only cash on you. If you’re afraid of carrying cash, get a secured credit card or reloadable debit card.

Part 4 Saving for the Future.

1. Build a cash cushion. If your car broke down or you lost your job, could you continue to pay the bills? Build a cash cushion by saving six months’ worth of expenses. Start small, by putting aside whatever extra money you can spare.

Don’t let debt repayment get in the way. Most financial experts recommend that you build up at least a small emergency fund at first—say, three months. Then you can tackle your credit card debt.

Ideally, you can do both at the same time—contribute some money to your emergency fund and some extra to paying debts down quickly.

2. Contact Human Resources about retirement plans. You might be surprised that your employer offers a retirement plan. Call up HR and ask. Also check whether or not they will match any of your contributions.

For example, some employers might match up to 4% of your base salary. This means you contribute 4% and they contribute 4%. If you only contribute 3%, then they will match that.

3. Research IRAs. If your employer doesn’t offer a retirement plan, don’t worry! You have plenty of options to choose from. The two most common are Individual Retirement Accounts (IRAs) and Roth IRAs. You can open an account with many online brokers. Choose which IRA works for you:

IRA. With a traditional IRA, your contributions are tax-free. This is a good choice if you anticipate being in a lower income tax bracket when you retire.

Roth IRA. The big advantage of a Roth IRA is that your withdrawals will be tax free. However, you pay taxes on your contributions. This is a good option if you anticipate being in a higher income tax bracket when you retire.

January 27, 2020