The financial reality check

For many, June represents good things--great weather, kids are out of school, and the start of summer vacations. Nature is in full bloom and people seem happier in general. I especially love June because it's the perfect time for a mid-year financial assessment. I like to see how far I've come with my goals and figure out what I should focus on in the coming months. In other words, I do a reality check.

No doubt, an assessment can make a person feel anxious. But we need benchmarks to stay on track. A financial check-up can be the wake-up call needed, as in the case of Christina and Melvin. They hit an emotional bottom when their debt totaled a whopping $405,988. It included a $290,886 mort gage, a $23,197 car balance, $71,342 in student loans, $1,700 for the previous year's income taxes, $1,613 in credit card debt, and $14,686 in past due, miscellaneous collection and near-collection accounts. At their checkpoint, it was sobering for them to sit and look honestly at the numbers. Making matters worse, Melvin had broken his foot, so he wasn't able to report to his construction job until he recovered.

We got right to work exploring options. Reductions could be made in their monthly spending by eating fewer meals out and cutting back on the telephone and cable bills. They could sell the family van, but they owed $6,000 more than it was worth. We even considered getting rid of pets and halting their sons' travel to track meets. Other than increasing income significantly, the most reasonable option seemed to be selling their home and renting a house or apartment. The $15,000-$16,000 in equity could be used to pay bills.

A month later Christina e-mailed me that after aggressively looking for a new job, she found one that paid more than $20,000 more per year with four weeks vacation, sick leave and other benefits. "I'm really excited," Christina wrote, "and wanted to share the news with you because your reality check was the motivation I needed to get up and do something instead of sitting around feeling bad about my situation."

Christina's decision to take action put her and Melvin on the road to financial recovery. A few months later, Melvin was able to work a lot of overtime, and by year's end, they both qualified for bonuses totaling $7,700!

For your own financial checkup, assess your total debt by listing all loan balances, credit limits, monthly payments and interest rates. Visit www.quicken.com for loan calculators to determine time lines for debt payoff at minimum payments. You may be startled to see how long it takes to pay off an account with minimum payments. When possible, pay extra.

Next, create a monthly spending plan. Estimate personal expenses paid from your monthly income. For example, "food" includes groceries, snacks, takeouts and dining out for breakfast, lunch and dinner. "Entertainment" includes movies, DVD rentals, concerts, theater and sporting events. Make sure that you modify the estimates until the expenses equal or are less than the income.

Credit is a good thing. Credit abuse is bad. And doing a mid-year financial reality check can be the catalyst to getting your finances straight by 2008 (if not sooner!). Remember: It's about progress, not perfection.

HOW TO GF RID OF DEBT

1. Set a goal for why you want to get out of debt, something that will motivate you to stay disciplined, such as the desire for a new home or to start a business.

2. Pay your bills on time. This will increase your credit score, which will lower your interest rates so more of your payment will go toward principal and pay off debt sooner.

3. Stop creating new debt. Ask your creditors to lower your interest rates, which will reduce your expenses. Make minimum payments on all credit cards except the lowest balance account with the highest rate. Put all extra funds on that account.

4. Increase your income and apply all extra money to debt.

COPYRIGHT 2007 Johnson Publishing Co.
COPYRIGHT 2008 Gale, Cengage Learning