Finance Roll

So far we've discussed assessment of our finances, budgeting, debt, and credit traps. Is this segment we will tie it all together by coming up with a plan to get our budget under control and begin building real wealth.

At the beginning of this series I likened budgeting to a balloon with a pinhole. You put a pinhole in a balloon and try to blow it up, but as air fills the balloon the hole gets bigger and you continually have to blow harder to keep the balloon inflated. Think of the balloon as your wealth and the pinhole as your spending. The key to keep the pinhole at a manageable level and allow the balloon to inflate you absolutely have to get a handle on spending -- a lesson our government would do well to learn!

In the budgeting exercise I suggested that you come up with three categories of spending: Necessary, Important, and Discretionary. We defined the Necessary category as things you are already committed to or the bare necessities of running a household like rent/mortgage, car payment (if you owe on a vehicle), groceries, utilities, etc. For many folks, debt makes up a significant amount of their necessary spending. If this is your situation then we need to start by looking at retiring as much of that as possible and/or restructuring it. The priority would be the debt upon which you are paying the highest interest rate (especially if any of that falls in the category of the credit traps that I discussed last segment). Identify those items and focus on them. How can you get those paid off as quickly as possible?

First, you may want to look at selling off some assets. Do you really need that boat? How often do you use it vs. how much are the payments are cutting into your budget? Would you possibly be able to get enough money from it to pay the note off and perhaps some left over to pay off other debts?

Then look at your Discretionary and Important spending. Would it be possible to cut back some of that and perhaps put a few extra dollars a month into getting rid of that credit card debt? How "important" are the things on your Important list? Would it be too much of a hit to your standard of living to eliminate or scale back on some of those things temporarily to get rid of high interest credit card bills?

Finally, you may look at the possibility of debt consolidation. For example, could you possibly take out a home equity loan at a lower rate of interest (which, depending on your tax situation, may also be tax deductible) to pay off higher interest rate credit cards or loans? Caveat: You have to be very careful in using this method of retiring debt. Some people will take out a home equity loan to pay off credit cards. This gives them a little relief and they start using their credit cards again. Now they have not only a home equity loan to pay on, but they're right back where they started with the credit cards again. You must be committed to not going back to old practices for this to work.

When looking at debt consolidation, always be very careful of using those "credit repair" or "debt consolidation" companies. Many of those are scams that will only make things worse. Also, use caution when transferring balances from one credit card to another just because it has a lower interest rate. Often the "low" interest rate is just an introductory rate and there is usually transfer fee. You'll want to make sure that you've read all the fine print and been through all the numbers when you restructure your debt.

Assignment: Think about the things we've discussed today and see if there is any way you can begin paying some of your debt off early. One way to look at it is to consider what you could be doing with that money if you weren't paying all that interest! Once you pay one debt off you can roll the money you were paying on that into paying off the next one.

Next segment we'll being to look at the part where wealth building really begins to pay off -- saving.