Managing Debt
You don't want debt to be a stumbling block that trips you up.
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When you're using money that could otherwise go into your investment account
to pay interest that's accumulating on old debts, it's time to take a hard look at your spending plan.
And if you're wondering what a
spending plan might be, it's probably time to put one together.
When you construct a spending plan, sometimes called a budget, you divide up your income so that it
covers your regular expenses — both essential and nonessential — always including some for
your emergency fund and ideally some for your investment account.
Some people use what they spent last year as a starting point — though last year's spending may
be what got you into debt. Or you may prefer to check the Bureau of Labor Statistics website
(www.bls.gov) for the average
nationwide expenditures for housing, food, and other costs. You'll have to modify that information
to reflect local costs and your own situation. But it's a place to start.
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KEEPING ON TRACK
If you're determined to stick to your plan, it helps
to keep careful track of where your money goes. Get into the habit of
writing down the cash you spend and where you spend it. Then, once a
month, using those notes, your bank statement, and your credit card
bills, analyze where your money went.
You may find you've underestimated some essential costs and overestimated
others. But since a spending plan is an evolving document, not a set of
rules, you can always adjust it if necessary. For example, heating your
home and buying gas for your car may jump in price at certain times, or
you may have unusual medical expenses in some years. You may also be
spending much more than you thought on something you consider expendable.
Following a plan doesn't guarantee you'll stay out of debt. But it does
mean you're less likely to be taken by financial surprise if you follow
the guidelines you've set for yourself.
FACING A TIDAL WAVE
If you owe more than you can comfortably repay
with your current income, an informal spending plan may not be enough
to solve the problem.
Rather than risk losing your home or your car, having your electricity and
telephone turned off, or your insurance canceled, be proactive. Ask your
creditors to change the terms
of your loans. They may agree to add the amount you're behind to the end of the loan, reduce
your monthly payment, or both. It will extend the payback period and cost you more in
finance charges
over the long term, but it may keep you from drowning in debt.
You may also decide to seek professional help from an accredited credit counselor, who will
help you change the way you spend and create a repayment plan. Check with the National Foundation
for Credit Counseling for a not-for-profit center near you. You can call 800-388-2227 or find
them on the Web at www.nfcc.org.
As part of choosing a credit counselor, ask how he or she will work with
you, and how your collaboration may affect your credit report. Ask, too, whether there is a
charge for the assistance. Payment arrangements vary from center to center.
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AUTOMATIC
PAYMENTSIf part of your debt problem is the result of not
paying on time, you may want to consider automatic bill payment arrangements
that help you avoid hefty late fees. For example, many utility, telephone,
and cable companies make it easy to sign up, and they debit your linked bank
account each month. Some credit card issuers also offer automatic payment
plans, which give you the choice of paying as little as the minimum
balance or as much as the full bill.
Of course, there has to be money in your account, or enough overdraft
protection, for the debit to go through. But you can time automatic payments
to coincide with the direct deposit of your paycheck — also usually a
good idea.
DON'T PANIC
While it's possible to slide slowly into debt, you're actually more likely to face serious
problems as the result of illness, an accident, or unemployment. That's why having an
emergency fund is so
important, along with adequate healthcare, disability, and life insurance.
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© 2006 by Lightbulb Press, Inc.
All Rights Reserved.
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