A financial cleanse: dealing with debt

Much like physical health, if you want to achieve financial wellness, you need to remove the toxins from your life. When it comes to your finances, that means dealing with debt.

Owing money for past purchases hamstrings your future. Accumulating interest eats away at your income.

An analysis of household debt at NerdWallet.com shows Americans owe the most on mortgages, and an increasing amount on student loans. Credit cards are the third-largest source of household debt.

But in most cases, that’s the debt you should tackle first, as it’s more likely to fall into that “toxic” category. Interest rates are typically higher. There are no tax deductions, as is the case for mortgages or student loan interest.

Also, the smaller balances mean you can get rid of that debt faster – allowing you to then snowball your payments toward that student loan debt, and lastly, your mortgage.

NerdWallet’s analysis shows 46.7 percent of U.S. households have a credit card balance. The average U.S. household credit card debt is $15,252 among households that owe money. Spread across all households, that number drops to $7,115. And the median debt (the amount in the middle) for indebted households is $3,300 in consumer debt, a very manageable figure.

If you’re ready to deal with your debt, here are some tips for tackling credit card debt:

  • Balance your budget. It’s Adulthood 101. You’ve got to live within your means. You’ll never stop the debt cycle unless the money going out is more than or equal to the money coming in. You’ve got two choices: reduce your expenses or increase your income.
  • Stop using your cards. You can’t pay down debt while also racking it up. Plus, if you carry a balance on your cards, your grace period – the time from you make the purchase and that purchase starts accruing interest – goes away. That means you’re charged interest on new purchases right away, increasing the cost of everything you buy.You don’t necessarily need to close the account (unless that’s the only way you’ll keep your fingers out of the credit cookie jar). Just cut up the card, lock it up or freeze it in a block of ice, whatever it takes to stop using it.
  • Pay more than the minimum. That minimum payment you owe your credit card is just that: a minimum. Depending on your interest rate, that amount may not even cover the interest you’re accruing, meaning you’d never actually pay off the card.If you’ve got debt on several cards, focus extra payments on one balance until it’s paid off. Most financial experts would tell you to pay more on the card with the highest interest rate first. An alternate tactic is to pay off the smallest balance first.
  • Call your credit card companies. If you’re in over your head, credit card companies may be willing to work with you, for example, by reducing your interest rate. They’d rather get something than nothing. You need to ask, though.Another option to reduce your interest rates is to transfer your balance to a lower-rate card. Read all the fine print, though. Balance transfer fees could eat away all your savings. That low interest rate could expire quickly, leaving you with an even higher rate.
  • Seek debt management – not debt consolidation. Financial guru Suze Orman does a great job distinguishing between the two options.Debt consolidation companies will tell you to stop paying your credit cards and will ask for payment upfront, as well as a percentage of the discount they negotiate for you. It ruins your FICO score. Don’t go this route.Rather, talk to someone with a debt management organization. These agencies can help you look at your financial situation and get you on a plan to pay off your creditors in three to five years. Their services cost you very little. One example locally is The Village Family Service Center. You can find other reputable services at www.aiccca.org or www.nfcc.org.

    Sherri Richards is a thrifty mom of two and Business Editor of The Forum. She can be reached at srichards@forumcomm.com

Money-Savin’ Mama: Living paycheck to paycheck? Think again

Money-Savin’ Mama has some tough love for you this New Year. It stems from a phrase I hear employed professionals utter far too often. “I live paycheck to paycheck,” they lament.

Sorry, but I don’t buy it.

There are people who do live paycheck to paycheck. They typically work long hours for low pay, support kids and have faced unthinkable, unfortunate life circumstances.

But if you buy fancy coffees at a coffee shop on a regular basis, you do not live paycheck to paycheck.

If you go out to the bar or eat at restaurants, you do not live paycheck to paycheck.

If you always upgrade to the latest and greatest tech toys or fashion trends, you do not live paycheck to paycheck.

If you spend money on trips, cigarettes, mani/pedis or sporting events, you do not live paycheck to paycheck.

And if you put more than a third of your paycheck toward housing or more than 10 to 15 percent toward a car payment and other transportation costs, you are not living paycheck to paycheck.

You are simply unwisely spending the money you do earn.

Does this mean you make enough money to do everything you want? No. That’s why you need to prioritize. Learn to distinguish your needs from your wants.

In his 2004 book “The Automatic Millionaire,” personal finance author David Bach explained the genesis of his most famous principle, The Latte Factor. A woman named Kim called him to the carpet, saying his advice to save $5 to $10 a day was unrealistic because – you guessed it – she was “living paycheck to paycheck” and “barely making ends meet each month.”

Bach walked her through a typical day’s expenses. First, she stopped at Starbucks for a nonfat latte and muffin. At 10 a.m., she bought a supplemented juice and PowerBar. Before lunch, she had already spent $11.20.

He showed her that, through the magic of compound interest, her daily latte would cost her nearly $2 million by the time she retired.

If you can trim the fat (and nonfat lattes) from your budget, even for a few months, you’ll likely find enough money to snowball a debt payment and/or stash some cash in an emergency fund. Track your expenses for a month or two to see where your dollars are really going.

Still struggling? Financial guru Dave Ramsey suggests getting “gazelle intense” – trim every last bit of fat until you are a lean, mean, money-saving machine. Because in truth, you can’t afford not to save for your future.

Here’s the key, though. It’s more than just making the numbers work. It’s your attitude. If you think you have no money, you will have no money. You won’t treat the money you earn with the respect it deserves. Realize the power of your paycheck.

Too many people fall into the trap of thinking that spending cuts are painful. That not spending money on non-necessities is a deprivation. Instead, you need to adopt an attitude of abundance and prosperity.

Look at what you have instead of what you don’t. Be grateful for what your money does allow you to do. Appreciate the things in life that don’t cost any money. And learn to love the money in your bank account more than the cup of coffee in your hand.

Sherri Richards is a thrifty mom of two. She blogs at topmom.areavoices.com