Time to dial back, spend less, save more. But you can’t fix everything at once–especially when you’re trying to dig out of a hole. What should you do first, and which are the next steps along the road? For some answers, I turned to the experts at the National Association of Personal Financial Advisors, who get people out of jams like these. Not every adviser takes the same approach. But after weighing all the opinions, I worked out a list that I think should help almost everyone:
FACE THE REAL PROBLEM. Credit cards don’t sneak out at night and go shopping all by themselves. What you do with your money shows where your values lie. “The choice isn’t between college saving and a 401(k), it’s between saving and leasing a BMW,” says planner Paul White of Manassas, Va. Until you change your attitudes, no financial plan in the world will do you any good.
LOWER YOUR SPENDING. Here’s a subversive thought: Aim to live on less than you earn. Harvest the surplus for savings and repaying debt. Where do you find the money in a budget that’s already tight? If you’re married, start with full disclosure. Couples with separate bank accounts may have no idea what the other buys. Then track the cash you take from ATMs (that money isn’t called “liquid” for nothing). Identify extras, cut them back, then cut them out, says planner Morris Armstrong of New Milford, Conn. Cancel all big consumer purchases for a couple of years. Then practice all the classic tricks: Shop only with cash (you spend less when you’re using real money). For plastic, use a debit card instead of a credit card (debit cards are cash, too). Don’t even carry a credit card (surprise! you can actually live without it).
ADD TO RETIREMENT SAVINGS. Use payroll deductions or automatic transfers from a bank account. Freelancers with irregular incomes should take a percentage off the top of every check (10 percent is nice). You’re creating what planner William Starnes of Hockessin, Dela., calls “artificial scarcity.” Less money hits your bank account, which will bring your spending down. Why do I put retirement first? Because life is long, you get tax breaks and payroll deduction works. Save enough in 401(k)s to get the full company match. If you don’t have a match, save anyway.
PAY OFF HIGH-INTEREST CREDIT CARDS. Send your tax-refund check straight to Visa or MasterCard. Look for other ways of making one-shot payments–from bonuses, yard sales or savings accounts. If any cards carry small balances, repay those first and then cancel them (just for the sense of accomplishment). Transfer balances to a low-rate card if you can get one. Set up a monthly payment schedule for wiping out the debt.
Impulse spenders should stop using credit cards, cold turkey. If you tell me you don’t earn enough to get through the month paying only cash–well, that’s the point. You can’t afford your current life.
Those who have their daily spending under control might use one clean credit card for new purchases and pay it off each month, says planner Jeffrey Mehler of Centerbrook, Conn. As you pay off the other cards, cancel them. Consumers need two cards, at most.
- DON’T BORROW AGAINST YOUR HOUSE TO PAY OFF CONSUMER DEBTS. I concede that, on paper, that course makes sense. Mortgage interest is tax-deductible (if you itemize) and the rate is far lower than what you pay on credit cards. “But debt consolidation and home-equity loans are Band-Aids on bullet wounds,” says planner Sherry Hazan-Cohen of Plano, Texas. “You have to stop the bleeding first.” Unless you’ve learned to live within your means, you’ll run up your credit cards all over again.
Here’s a maxim to post on your wall: you don’t get out of debt by borrowing more.
START AN EMERGENCY FUND. Some of you would put ready cash first on this list (well, maybe second). So would I, if your job is insecure. But it seems to me that the minute you build an emergency fund–kaboom! Along comes an “emergency.” It can be anything you want–an unpaid bill, a sale at Sears, whiny kids demanding hamburgers. I’m all for having cash savings on tap, but only if you don’t spend on impluse and have repaid your consumer debts.
SAVE MONEY FOR COLLEGE. This worthy goal falls last on my list because you have alternatives: loans, student jobs, lower-cost schools and money squeezed from your monthly pay. Parents need to be honest about this expense, with both themselves and their kids, says planner Howard Singer of Amherst, Mass. When you can’t afford a “logo” private college, say so–early and often. Don’t wreck your retirement trying to pay for it anyway.
