Five steps to measuring your financial IQ

Most people work hard to be responsible with their money, but sometimes might wonder if you are "doing it right." Others are seeking new ways to make the most of their income and minimize expenses. And still others try, but might have a sneaking suspicion that they are making some major mistakes.

To check if your personal finances are on track, ask yourself about these five areas of money management:

1) Credit: Credit is an important part of financial management because it affects whether you are able to get loans for a home, a car or an education, and the interest rate you will pay for any money you borrow. A copy of your credit report is available at no charge once a year at www.annualcreditreport.com or by calling 877-322-8228. Review the report carefully to check if the report is accurate. To improve a score, and maintain a good one, always pay bills on time. Also, be aware of credit utilization, an important term in credit score determination. If you have a credit card with a limit of $10,000 and you owe $3,500 on it, your credit utilization is 35 percent. Anything over 35 percent is considered high and can impact credit scores. Over 50 percent will have a definite negative impact on a credit score, and a maxed-out card will verynegatively impact the score. And, work hard to pay credit card bills in full every month; in other words, do not purchase what you cannot afford.

2) Debt: Debt is not like childhood monsters under the bed -- if you close your eyes, it does not go away. It is important to know how much you owe, know how much you are paying for debt in fees and interest or finance charges, and have a plan to repay debts. Keep track of bills so that you will notice if a bill does not arrive, and mark due dates on the calendar so you can plan to have money available and pay on time.

3) Budget: For financial health, it is very important to plan how to spend your money. Whatever budgeting tool you use, it is important to know what you earn and what your expenses are so that you can spend less than you earn. Also, keeping a budget can help you anticipate expenses and save for them. With a savings plan, a higher-than-expected bill will not result in a crisis or a rush to the credit cards. Budgeting need not be complicated, either. While plenty of software and online guides (some free) are available, simple pencil and paper can work just as well.

4) Wealth: Wealth is ultimately not about seeming rich or accumulating flashy purchases, but about preparing for the future and building a safety net. Do you own a home, or are you on the road to home ownership? Are you planning for retirement? Are you covered with appropriate insurance? By looking ahead and planning accordingly, anyone can build his or her wealth.

5) Life plan: Another important part of financial smarts is matching your resources to your goals. Having an established career path helps anticipate both income from future work and costs, such as returning to school. Knowing what expenses are on the way will help you plan for major life events such as marriage, a child's education or retirement.


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