Good time to whip finances into shape

On The Money

May 25, 2008|By Gail MarksJarvis | Gail MarksJarvis,Your Money

There is no leniency.

Credit card companies and banks are worried that people are drowning in debt and will fall behind on payments. With home values declining and banks wary of handing out loans, outlets for escaping overwhelming debt are limited.

Consumers are finding themselves caught. Card companies are getting tougher, sometimes canceling unused cards or raising rates seemingly for no good reason. And 30 percent of banks said in a recent Federal Reserve survey that they had tightened standards on consumer loans.

Delinquencies on consumer credit are rising. According to the American Bankers Association the level of delinquencies recently was the highest in almost 16 years. To try to fend off higher rates and other consequences, analysts say, consumers cannot afford to continue lax financial practices. Looking like a bad risk can keep people from obtaining more affordable loans on homes or cars, and end up with painfully high credit-card interest rates. So whip your finances into shape.

*Interest buildup

The impact of running up debt and missing payments can be tremendous.

Say you have $5,000 in credit card debt and your interest rate is 12 percent. If you pay $100 a month you won't pay off the card in full for almost 25 years. During that time you will not only have to pay off the original $5,000, but you also will be spending about $4,700 in interest.

If you miss a payment along the way the pain can become much worse. Credit card companies often reserve the right to increase your interest rate if you miss payments, even if your payment just was bogged down in the mail. Under proposed legislation they are limited in what they can do with an outstanding balance. But that doesn't stop them from raising rates on your future purchases.

*Getting organized

If you find that when the car needs new tires you must turn to credit cards because there is no cash on hand, it often means you haven't figured out how to make your pay last through the month. That's different from not having enough money.

The key is to set up your accounts so they are foolproof.

First, calculate what you spend now. You will need to look at your checkbook and credit card statements to see where your money goes each month. Look at the last two months, and then hunt for annual expenses or biannual expenses like property taxes. Once you have the data, add up everything you spend in a month, including monthly allocations of the annual expenses. Put each expense into one of four categories to see if your priorities are in sync with your needs:

1. Essentials such as rent or mortgage payments, electricity, water, food, car payments, etc.

2. Entertainment or fun, or what you enjoy rather than need - everything from vacations to a movie rental.

3. Future expenses such as tires for the car, maintenance for your home, and retirement saving.

4. Income taxes, Social Security and Medicare.

Then subtract all of these expenses from your gross pay, or the amount you are paid before taxes are subtracted. When you do this you will see immediately if you have been spending more money than you make. If you are, you will have to look for ways to reduce spending.

*Don't neglect the future

The future category is what people often ignore, and that's where they land themselves in trouble. Save a little from every paycheck - ideally about 5 percent of your pay - for coming necessities or emergencies. If you are turning to a credit card for car repairs you aren't being realistic about what you actually need to spend if you own a car.

In addition to saving for necessities that come up sporadically, you need to save for retirement. As a rule of thumb, in order to have enough savings for retirement, people - starting with their first job - should be saving 10 percent of their pay for retirement.

In her book Easy Money: How to Simplify Your Finances and Get What You Want Out of Life, Liz Pulliam Weston notes that when people jumble all their money together in a single account they lose the ability to channel money toward the three categories besides taxes.

She suggests having three accounts - a checking account for the essentials you must pay for every month, a high-yield savings account for the less immediate needs, and an account for retirement savings - a 401(k) or 403(b) at work or individual retirement account at a mutual fund company or discount brokerage firm and then setting up your paycheck so money flows automatically into the three accounts.

*Making it happen

If you find you are spending more than you make, you will need to make adjustments.

That means cutting spending or increasing your pay.

*Credit card cure

To release yourself from the burden of credit cards, pay more than the minimum each month. You can calculate what you are doing for yourself by using the Web site or use the "debt reduction planner" at

The one way to escape high debt is to put your credit cards aside and not use them.

There are different theories on the best way to get rid of credit card debt. The smartest approach is to get rid of the money on the card with the highest interest rate. But sometimes that's the toughest one to finish off because of that rate.

In addition, don't make the mistake of eliminating debt and adding debt at the same time. If you are making extra payments, but still using the credit cards, you are fooling yourself.

Gail MarksJarvis writes for Your Money.

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