What to do when your finances are out of control
If there’s one thing the recession has taught, it’s that most of us could stand to be a wee bit more careful with our cash. But what do you do when your finances have really gone off the rails? Our resident money expert gives three families in trouble her best advice.
FINANCIAL WOES CAN SEEM TO APPEAR OVERNIGHT: Your husband loses his job, the car breaks down, a tax bill is higher than expected. But, in fact, they’re typically the product of bad habits adding up — a combination of everyday missteps and lack of planning that ultimately lands you in a precarious position, ready to be knocked over by the first bit of bad luck. The good news in all this is that no matter how big the mess, you always can make it better.
Exhibit A: Parenting.com’s Family Budget Boot Camp, for which our editors matched struggling families with financial planners, and challenged them to do just that (and blog about it!). Below, we share how we think they can start fixing things — and how you can, too.
“I have $10,000 worth of credit card debt!”
BRONX, NEW YORK
Natasha Greenslade, 24, knows clearly that she owes five figures on some 15 store and credit cards — at up to a whopping 29 percent interest. What’s fuzzier for the mom of two, who lives in a modest apartment with her partner and her boys, ages 1 and 4, is how that happened. “I only buy necessities, like winter clothes for the kids,” she says.
In fact, one disconcerting and frustrating truth about debt is that it often results from a steady buildup of small expenses: Using credit for a birthday gift here, a pair of shoes there, can sink you super fast. Perusing Natasha’s monthly costs, Gerry O’Donoghue, a financial planner in Mt. Kisco, NY, found she regularly went $200 to $300 over budget. (Catch up with all the boot-campers on Parenting.com.)
Follow the money. You can’t get out of debt until you know what you spend and where — and most people really don’t. One simple way to suss out a rough monthly figure: Get a receipt for everything your family buys, even that cup of joe at Starbucks, then stash all those with your bills in a big manila envelope, and tally everything after 30 days. (Remember to print out e-mails documenting auto-payments, and add in some amount for irregular costs, like trips.) Want digital help? Join one of the web’s many free budgeting websites — such as Mint.com or Thrive (justthrive.com).
Cut, cut, cut. You don’t have to live without cable, a gym, or a vacation…forever. But you need to take drastic steps to get your expenses down so that you can pay off what you owe, and trimming nonessentials is the best start.
Hide your cards. Or chop them up. You need to get used to living on what you earn.
Start saving. Salt away a small amount — even $10 or $15 a week — in a bank account that you can’t access with an ATM card. This is your cushion so that when, say, your child’s prescription isn’t covered, you can pay with cash instead of Visa. Aim for a small cushion of about $500, build it up to $1,000, and eventually — as you pay off debts — gather a proper emergency fund of at least three months’ worth of living expenses.
Call in help. Paying only the minimum on your cards will just keep you on the debt treadmill, so if you’re stretched that tight, it’s time to consider debt consolidation. Go to a reputable organization like the National Foundation for Credit Counseling (nfcc.org).
“Help! We owe more on our mortgage than our house is worth!”
Leah, 35 (who didn’t want her family’s last name used), bought her house in 2003, after her first marriage ended. At $160,000, it was more than she could comfortably afford. “It was an emotional decision,” she admits now “I wasn’t financially prepared.” Leah put down 10 percent and took out two adjustable-rate mortgages, promising herself that she’d refinance to a fixed-rate when she could. But after her marriage to Eric in 2007, this seemed less urgent: The couple was making more than $100,000 a year, and home values were rising. So instead, they borrowed about $94,000 against the house and used it to make home improvements, take a honeymoon, and pay off their credit cards. Cut to 2008: When real estate values plummeted, Leah and Eric owed a whopping $238,000 on their home — and then both lost their jobs. Soon they were threatened with foreclosure.
Take stock. Being “upside down” on a mortgage is a serious risk factor for foreclosure, but the latter isn’t a given. Homeowners’ situations range widely: Some of the worst off are those who, like Leah and Eric, borrowed against a house that is now worth much less. But the vast majority are still making their payments and hoping for better days ahead. Web calculators like Payorgo.com can give you a rough idea of your status, but for a real appraisal, contact a lawyer or home counselor.
Call your lender. Anyone whose terms have changed for the worst should at least attempt a refinance. And if you’re at risk of defaulting on your mortgage for any reason, call your bank and explain your situation. There may be something they can do temporarily to help.
Get counseling. A 2009 study by the Urban Institute found that at-risk homeowners who took part in the National Foreclosure Mitigation Counseling program were 60 percent more likely to avoid foreclosure — in large part because the program helps them obtain loan modifications and navigate paperwork. For more info, call the HOPE hotline, 888-995-HOPE, or visit Hopenow.com.
Consider bankruptcy? Should all these fail, you might have to consider filing for bankruptcy. It’s expensive and stays on your credit report for seven to ten years, but it may allow you to keep your home or some of the equity.
?Or a short sale. The bank will have to agree to let you clear your obligation by selling your home for a lower price than owed.
Regroup. Ultimately, your most important act might be “figuring out why this happened in the first place,” says Karen Lee, a financial planner in Atlanta set to work with Leah and Eric. She points out that even when the couple had plenty of money, they lived well beyond their means. To rebuild, they’ll have to change that pattern.
“I’m a newly divorced mom and need to get back on my feet!”
Lori Chance, 33, says that while she was married, she did as many wives do: She let her husband take the lead directing the couple’s finances. “Somehow, I was raised to believe that when it came to money it was ultimately up to the man,” she says. Together, the couple had some rough times — a disastrous no-money-down home purchase, using plastic to pay bills, and a personal bankruptcy filing in 2001. When they divorced last year, Lori told herself that, for the sake of her 9-year-old son and 6-year-old daughter, she’d have to finally take control of her own financial life.
Not that it’d be easy. Jobless and hobbled by both a dinged credit report and a spotty employment history (after five years as a stay-at-home mom, she’d worked mainly in her husband’s businesses), Lori moved the family in with her mother, wondering what would come first: new money skills or any money to handle.
Do a background check on yourself. If you haven’t been involved in bill paying, you’re going to have to do remedial work to get a full picture of your finances. Pull your credit report and comb through it to make sure there are no errors, and that you’re clear on all your responsibilities. If you feel something needs correcting, contact the credit bureaus.
Assess your income and expenses. A dramatic life change no doubt means a new cost of living, so you’ll have to create a working budget that can help you reestablish financial stability. (If you’re going through a divorce, you’ll also need this to negotiate alimony and child support.) Consider: What does your current home cost and can you afford to stay there? What are the basics you require (e.g., a car to get to work) and what can you skip? Are there new debt payments, extra insurance, a new commute for you or the kids, or additional childcare to consider? how can you keep steady with your retirement and savings?
Factor in fun. As Derek Lenington, a local financial planner who’s been working with Lori, knows, “it’s easy for a single mom to get burned out, making it less likely she’ll stick to her financial plan.” he made sure that Lori worked a small amount of “me money,” initially just $25 a month, into her budget.
Set some goals. From your calculations, come up with a well-reasoned amount that it will cost you to live each month, then multiply that number by 12 to arrive at your net (after-tax) income goal. (Remember to add in estimated taxes; the IRS has tax calculators at IRS.gov.) Obviously, having that number won’t magically make a job appear — as Lori discovered. But again, figuring out your financial basics can help you think through tough choices with greater clarity Lori knows there’s no way to fix all the leaks in her little boat overnight, but at least she is pulling together a workable blueprint for permanent repairs.