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Terminate the debt monster
Attack credit card debt with a 30-month debt-management plan, advises radio personality Clark Howard.
Out of the red and into the black

Spotlight: Clark Howard

You can start thinking about an emergency fund or a rainy day fund only when you knock down 100 percent of your credit card balances. And even after you knock out your credit card debt, you might not even need to set up a separate emergency fund or rainy day fund if, instead, you're already saving money in a Roth account. A Roth IRA, in fact, is the absolute best place for such money.

With rainy day accounts, if you're already in debt, it's not raining, it's pouring.

Let's say you had a real emergency and you had to pull money out of your Roth IRA. Well, you're allowed to pull out all of your contributions, but not any of your earnings, tax- and penalty-free. Now, of course, this account shouldn't be raided for just anything but real, genuine emergencies. But, in my opinion, putting your money in a Roth IRA is a much higher priority than putting your money into a "rainy day" savings account.

OK, so let's assume that you make it through that 30 month to 60 month regimen and you manage to pay off all of the outstanding debt on your credit cards, and then you want to close all but one or two of those accounts. Can you do so without negatively impacting your credit score?

Well, you really don't want close those accounts; you just want to cut up the cards. Because if you do close out those accounts, that will hurt your credit score. Unless you know that having an open credit card account is going to be too much of a temptation, I'd recommend keeping the accounts open but unused.

What percentage of your total annual income can you safely commit to the overall cost of housing (your mortgage, taxes, home insurance, etc.) and how much should you be setting aside for your retirement?

Those are great questions.

Let's begin with housing. You know that in the recent housing boom, people were devoting as much as 50 percent of their income to housing, and that's why we're looking at a situation where so many people are in trouble. You just can't do that, you can't do half. I like a quarter. Yes, I know that a lot of the models out there say you can do anywhere from 28 percent to 33 percent, but I like 25 percent because you then have some financial wiggle room for any emergencies and you're going to be able to maintain a sort of financial comfort-zone in your life.

As for the retirement question, that one doesn't really have a single answer because it all depends on the time when you start saving for retirement. If you start saving when you're in your twenties, and you stay with it through your working career, as little as 10 percent will get the job done. If someone starts saving in their thirties, though, they'd need something like 15 percent.

-- Posted: March 17, 2008
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