COUPLE 1: "Our debt keeps growing!"
Who? Amanda, 25, a girls' basketball coach, elementary school tutor, and student; and Christopher, 27, a self-employed subcontractor. Married in August 2003. Moved from Idaho to North Carolina, realized it wasn't working financially, so moved back to Idaho (where Amanda is from).
Financial 911:
- Having moved twice in two years, the couple is really feeling the financial pinch.
- Still building his business, Christopher is bringing in about $500 a week.
- Amanda isn't earning much income as a coach or tutor and has to pay for tuition without the benefit of financial aid.
- Amanda has $7,500 in school loans to pay back at 5.3 percent interest. And she'll have more loans when she graduates in the spring of 2008.
- Credit card debt includes $7,200 (at 4.99 percent interest); about $1,300 (at 0 percent right now but will go up to 7.99 percent in the next few months); and a Best Buy card with about $650 (at 0 percent interest until 2007). They also owe $6,500 on their Jeep.
Monthly Expenses:
- About $500 every six months in car insurance
- About $810 every month for cell phone, life insurance, car payment, food, and household expenses
- $595 for rent
Savings:
- They have $1,525 in savings but are planning to spend it on the cheapest car they can find.
- They're trying to sell their Jeep for at least $8,000.
- Both have good credit scores and just opened up an Emigrant savings account (thanks to The Nest financial message board tips!), which yields 4 percent annual interest.
The Road to...a Debt-free Life: Kathy Miller, author of
Too Busy to Budget, applauds these two for their strategizing. "The fact that they moved twice shows that they tried something, and when it didn't work, they admitted it and acted accordingly," Miller says. She also commends them for their credit scores and interest rates, which show they pay their bills on time. Besides keeping up this good behavior (and putting off another move until they're ready to buy a home), she suggests taking these steps to help you and this couple to get out of debt.
STEP #1: Establish a system.
Track income and expenses, as well as loan and credit card balances, in an organized way -- not in your heads! Chart out the information in a notebook with exact due dates, balances, and interest rates (financial planning notebooks/calendars are sold at your local bookstore, or get Miller's version at agoodsteward.net).
Record all debit or credit card transactions in a checkbook. Adding and subtracting your paychecks and purchases will make you even more aware of your spending. Plus, you don't want to lose money if the bank miscalculates something.
Designate one folder for checkbooks, receipts, and other information regarding financial transactions. Use another file marked "payables" for credit card statements, car and insurance payment booklets, utility bills, and so on. Keep it all together until everything has been paid. This system will let you see how choices are affecting your bottom line and allow you to develop skills for planning for the future.
STEP #2: Concentrate on credit cards.
Focus on paying off your credit card debt, starting with the highest interest rate first. You'll want to pay the minimum on all loans and credit cards you have, but you should pay more than the minimum for the credit card with the highest rate.
[Nest Note] If you have bad credit, you'll want to establish a "secured" credit card, which can improve your credit rating. To get such a card, you first must put a deposit down so that if you default on a payment, the card issuer can deduct payments from the deposit. Then you'd want to pay off all nonsecured credit balances first.
STEP #3: Make decisions for the long-run.
Buying a less-expensive car is a good idea, but make sure the new purchase is reliable. An older "junky" car could need more repairs and might eventually cost you more money than your previous ride. Amanda and Christopher could consider using their Jeep as a trade-in for a new or nearly new small, economical car. Depending on the trade-in value of the Jeep, they might be able to get a smaller monthly payment, and a new-car warranty will ensure they won't have unexpected repair costs.
If you're ready to buy a home in a few years, an economical, reliable car will still provide you with dependable transportation, your regular monthly car payments will have improved your credit rating, and you will own something of value -- you'll have an asset.
STEP #4: Find money for school.
If your school doesn't give you financial aid, keep looking -- and don't take no for an answer. There are grants, scholarships, and other programs for specific majors, including teaching. Amanda should check out aft.org/teachers/jft/loanforgiveness.htm to get started on researching the options.
STEP #5: Ask the experts.
To get advice on your financial plans, check in with a professional once a year and before you make major life changes (new baby, new job, new home, and so on). These pros keep up with ever-changing tax laws and financial products and can objectively look at your whole picture, including your goals and potential obstacles -- all to help you save more money.
According to the Federal Trade Commission, many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit-counseling programs that can help you out.
COUPLE #2: "We want to save up for a house -- and kids!"
Who? Mary, 26, a teacher; and Nathan, 26, the manager of training and recruiting for a distributor of plumbing supplies. Married July 2005. Recently moved to Columbia, Maryland, which, due to its proximity to both Baltimore and Washington D.C., has a super-hot housing market.
"We know logically that this is a bad time to think about buying a house, much less having a baby," Mary says. "But it's hard to accept having to wait to do what we've always dreamed about."
Financial 911:
- Have about $20,000 in credit cards, $20,000 in student loans, and a $14,000 car loan
- Annual combined income of about $87,000
- Mary admits she spends way beyond her means and doesn't think about the bigger picture.
Monthly Expenses:
- $2,184, which includes rent, cable, phone, and car and renter's insurance
- A minimum of $1,010 in debt payments ($187 toward student loans, $485 toward car, and the rest toward credit cards). For the past two months, they've paid a little extra on the highest balance and the minimum on the others cards, including the student loans, since the interest is tax deductible.
Savings:
- About $4,000 in a regular savings account
- Nathan participates in a corporate stock purchase program.
The Road to...Home and Baby: Miller likes that they're immediately putting extra money each month toward paying off their credit cards. Even though it means they're not saving much money, they're making good progress to pay off debt. And the monthly interest rates they pay on credit cards are much higher than the interest they'd be earning with a savings account, so they're saving money that way. Here are her suggested next steps for you and for them:
STEP #1: Track spending.
It's impossible to fix the problem without understanding exactly what's causing it. Create a system for monitoring credit card and loan balances. (See "Step #1" for Amanda and Christopher above.) This way, you'll be able to determine where you can cut back on spending, and you'll have more control of your finances.
STEP #2: Educate yourselves.
Home ownership might not be as far away as you think. Many couples think they have to have all their debt paid off before they can qualify for a mortgage, but this isn't true.
Take a first-time home buyers class together, or sit down with someone at your bank and find out how much of a mortgage you'd qualify for today. But be cautious: Once you find out the mortgage you'd be eligible for, break it down to see if the monthly payments would be within your reach. Just because the bank would approve you for such a mortgage doesn't mean it would be affordable for you on a monthly basis.
STEP #3: Think about the long-term.
The couple should open a 401(k) account and start planning for retirement. It seems far away now, but based on their current debt and goals, they could be in big trouble once they're ready to stop working.
My advice is to give as much as your company will match and then reorganize your monthly budget from there. If your employer doesn't match, you should put as much of each paycheck into a 401(k) that you can afford without creating a stressful situation.
With babies on the brain, set up a strict budget to get your finances in a good place by the time you want to be pregnant. What's a good place? Baby Bargains says the average cost of a baby's first year is $6,200 -- and it likely goes up from there -- so start budgeting an extra $516 a month into your pre-pregnant plan (put it toward your credit card for now). Once you do become preggers, you'll hopefully have paid off a majority of your debt and will already be comfortable with the baby budget. Just remember: It's likely to get even tighter as the tyke gets older.
[Nest Note] Couples who are in credit card debt shouldn't worry about having savings as much as paying off their balance. Why? The money spent on paying credit card interest is more than the interest earned in a savings account -- and that means a loss of money overall. So pay off the card balances, and then start saving money without accruing any more credit card debt (shell out the money for bills on time and in full).
STEP #4: Get help.
Check with your bank or credit union to see if you're eligible for a consolidation loan or some other way to lower your interest rates on the two larger credit-card balances.
COUPLE #3: "We're so focused on saving, but we're still in debt."
Who? Amy, 27, works in human resources; and James, 28, works in research and development. Married October 2004; live in Atlanta, GA.
Financial 911:
- They have a combined income of $81,000.
- They closed on their first house at the end of February 2005.
- They're working on paying off $16,000 in credit card debt, $10,000 of which is in 0 percent interest credit cards.
- They have $8,500 in student loans (at 1.75 percent interest).
- They owe $3,000 to Amy's dad for helping with the house down payment.
- They're hoping to create an emergency fund: six months' worth of living expenses.
- With dreams of a baby in the next couple of years, their goal is to have no credit card debt and $5,000 to $10,000 in savings (not including the emergency fund) before they start trying.
Monthly Expenses:
- $680 to credit cards
- $102 toward student loans
- $1,350 for mortgage, electricity, and everything else
- Nothing yet to Dad, but payments for that will start soon (at an affordable "family" rate, of course).
Savings:
- Each is contributing 10 percent of his or her salary to a 401(k). Amy's company matches 1.5 percent; James', 6 percent.
- They're putting $100 into savings each month, but much of it is used for birthday and holiday presents and dinners for friends and family.
The Road to...Financial Sanity: Miller loves that this 20-something couple has a home, is saving for retirement, and has a 0 percent credit card. They do have debt -- and goals for the future -- so here are her tips for feeling less strapped for cash.
STEP #1: Watch interest rates.
Focus on the debt with the highest interest rates. Since student loans are at such a low rate, keep paying the minimum each month -- and pay off the credit cards first. The 0 percent credit card rate is probably just an introductory offer, so read the fine print carefully and pay that credit card balance off before the interest rate increases.
Student-loan debt can be paid off next. If you buy a house before the student loan has been paid, the first priority is to make all monthly house payments and student loan payments on time. If extra money is available, an accountant can help you decide whether to put it toward paying down the student loan balance or the mortgage.
STEP #2: Strategize with 401(k)s.
Don't overdo the 401(k). Considering you still have debt, reduce your 401(k) contributions (but not below what the company matches) and put the rest of the money toward paying off credit cards. By putting so much away but still paying interest on bills, you're running the risk of spending more than you're saving.
STEP #3: Give your situation a second look.
You want to know if you're saving too much, but you're the only ones who can answer that question. Once you downsize your 401(k) contributions and make a dent in your debt, you can reanalyze your financial status.
If the strict budget is sapping your enthusiasm or causing stress in the relationship, you might need to loosen up a little -- even if it means not putting as much as you'd like into your 401(k). You might just need a few new ideas for fun, inexpensive things to do together.
-- Monica Buck
See More: Getting Out of Debt