NEW YEAR'S RESOLUTION #1: LIVING WITHOUT DEBT
Lori Z. Bahnmueller
Michigan Credit Union League - Your Money Matters
SOUTHFIELD, Mich., January, 1999 —If you're in debt, you're not alone: The average consumer carries more than $5,000 in credit card debt these days, and 1.35 million Americans filed for bankruptcy last year, almost three times the number a decade ago.
The sad truth is that millions of Americans awoke on New Year's Day with two hangovers; one hangover from partying a bit too much and another hangover from spending a lot too much. Many will not know the full extent of the damage until their Visa or Mastercard statement shows up in a few weeks. For many Americans, their holiday debt will be added to an already unmanageable pile of debt from earlier spending. What will the New Year hold for them?
I sincerely believe that it's one more chance to change their spending habits. There are encouraging signs that many Americans are starting to realize the urgent need to start saving for tomorrow. People are beginning to realize that they can't keep spending more than they earn. But the key for today is to get out of debt.
#1 - Understand that credit is not more money. If your credit card has a $5,000 limit, you don't have $5,000. You only have the right to rent $5,000 and you'll pay a very high price for that right.
#2 - If you're going to use a credit card, make sure it doesn't have a high interest rate. With a little shopping around you ought to be able to find a card at 12.9 percent or below. Credit unions have traditionally had better rates than other lenders. The phone is the fastest way to comparison shop.
#3 - Stop using credit. People find it easier to spend when they pull that plastic out of their wallet but in the long run, it's cheaper to pay cash. If you can't control your credit card spending, cut your cards up and throw them away. If you crave the convenience try a debit card. It offers all the immediate access of a credit card along with immediate reduction of your checking account.
#4 - Sit down and make a list of your debts. Include how much you owe and what rate of interest you are being charged on each debt. Pay off the one with the most expensive interest rate first, not necessarily the largest amount owed. Update the list each month and total the amount owed to make sure that it is getting smaller each month.
#5 - Establish a savings plan. You should have both short-term and long-term savings goals. The short term is for things like insurance, auto repairs, holiday gifts and other regular, predictable costs. The long-term is for house down payments, kids' college and retirement. Keep the two funds separate and set a specific amount to go into each fund out of every paycheck.
#6 - Save first. Don't try to save out of whatever money is left over after other bills have been paid. There won't be any. You have probably already been living beyond your means but credit has disguised it. Making your savings payments first forces you to see what you really have to live on.
#7 - Carry a little notebook around with you for one month and write down everything you spend. Everything from the home mortgage payment to the 454 pack of gum. Small things can add up. Even a low-cost $5 lunch each working day will cost $1,250 over a year. You can't start trimming costs until you actually know what you're spending.
#8 - Based on your savings goals and the spending patterns you've tracked, establish a spending plan. Then follow it. The plan doesn't have to be brilliant, it just has to be followed. You don't have to be a rocket scientist to design a budget, you just need the will to follow it.
#9 - Involve your family in your budget planning. A successful budget isn't imposed from above, it emerges from consensus. If everyone in the family doesn't feel their interests have been considered, they won't be motivated to make the spending plan a success.
#10 - Compare fees and services at various financial institutions. For example, credit unions typically offer lower fees on everything from checking accounts to credit cards. Credit unions also generally offer higher interest rates on savings accounts.
Lori Z. Bahnmueller is director of Public Affairs for the Michigan Credit Union League, a statewide trade association representing Michigan credit unions. Send your financial questions to "Your Money Matters" c/o the Michigan Credit Union League, P.O. Box 5040, Southfield, MI 48086-5040, or stop by our Web site (www.mcul.org) to learn more about smart money management.