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Make a Plan to Reduce Your Debt
The recession — and subsequent slow recovery — has caused
millions of Americans to focus even more closely on living
within their means. If you are ready to face up to your own
financial realities, one crucial step is to set out a plan of
action. Here are some key considerations to keep in mind.
Keep Track of Your Spending
It's hard to reduce your spending if you don't have a good
idea of how much you are spending. Keep track of your typical
monthly expenses for three months to find out where your money
is going. To get an even more realistic idea, factor in some
unexpected expenses — such as auto and home repairs. Once you
have a record of your spending, compare your average monthly
outlay with your monthly income. If you have a surplus, this is
the amount you can apply each month to paying down debt and
building savings. If you have a shortfall, you'll need to
examine your expenses more closely to see what you can
potentially cut back or cut out.
Keep Saving
One way to establish good saving habits is to make saving
even easier than spending. A handy tip is to set up separate
savings accounts with separate goals attached to them. Here are
three suggestions that can help you better allocate your
savings.
- Emergency Account: Your
goal for this account should be to build up at least three
to six months of living expenses. This way, if you lose your
job or need a lump sum to pay for a significant expense, you
may not have to tap into your other savings or ring up more
debt.
- Family Account: This
account can help fund your children's school expenses (such
as class trips and team uniforms) or vacations.
- Investment Account:
This account should be reserved for general or long-term
saving goals.
Hopefully, you already have a retirement savings account
(either through your workplace or on your own) and perhaps a
college savings plan. But having another account to save for
other longer-term goals — maybe to start your own business or
remodel your home — can be a smart move.
Keep a Tight Watch on Your Credit Cards
If you've accumulated significant credit card debt, you've
first got to stop the bad behavior. Paying off debt is easier
once you stop using your credit cards.
- Pay off your highest interest
credit card debt first, making sure you avoid the
"minimum balance trap." Paying more than the
minimum can make a big difference.
- Consolidate your debt by
transferring outstanding balances to lower-rate cards. If
you don't want to transfer your balances, you may be able to
get your current credit card company to match the interest
rate of a competitor.
- Cancel all cards except for
the one that offers the lowest interest rate.
- Finally, set up a realistic
payment timetable and stick with it. If you have trouble
keeping pace, talk to a professional. The counselors at the
nonprofit National Foundation for Credit Counseling can help
develop a more structured plan for you. To find the nearest
location, call 800-388-2227 or
visit http://www.nfcc.org.
© 2011 McGraw-Hill Financial Communications. All rights
reserved.
January 2012 — This column is provided through the Financial
Planning Association, the membership organization for the
financial planning community, and is brought to you by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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