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In debt? Get out in three hard steps.

Steve Bucci, the Bankrate.com Debt AdviserIn debt? Get out in 3 hard steps

Debt Adviser,
Hello. My husband and I have a considerable amount of credit card debt at a low interest rate. We have good credit; just had a business venture that went bad. Now that we are getting back on our feet again, we are currently trying to set up a budget plan. Is it wiser to use a majority of extra money to pay down the debt faster, or establish funds in individual areas such as vacations, furniture purchase, remodeling, "fun" money, etc.? Thank you for your advice.
-- Angela

Dear Angela,
"Fun"? You write to The Debt Adviser about "fun"?!? All kidding aside, no one enjoys the fruits of his labor more than I do. I have a Celebrity cruise planned for next month, and I can't wait. The answer to your question, however, lies in restoring balance to your financial and personal lives.

Business failures, credit card debt and, yes, even too much fun, can tip the scales of your daily lives, but you can get out of debt with three steps and some hard work.

1. Get a plan. I always like to start with some goal setting to lay out the reasons you are going to be delaying the urge for immediate gratification. As you set up your budget, begin with identifying all your sources of income.

Next, account for as many expenses as you can. Don't forget those periodic ones, such as taxes, insurance and the like, that you may not think about every day. Now before you allocate the leftovers, I suggest your husband and you each list the things you will want to do in the future. Try to segment them into categories: one year or less, five years or less and then the rest we can call "long term," which, don't forget, includes retirement. Put a price tag on each, and see how much you will need to save to afford them. This exercise will help get you both on the same track and bring a bit of reality into the picture.

2. Don't forget the "emergency fund." There is one category that I don't want you to forget: the emergency fund. This is an unallocated savings account that over time will grow to at least three, and, one hopes, six months of expenses (not income). Without this fund it will be extremely difficult to reach any of your long-term goals. Life will come along when you least expect it and suck up that money you had planned to use for fun. So be prepared, and protect your goals with a nice buffer of cash (or other liquid assets).

3. Aggressively pay down debt. Paying off your debt should be your other top priority, and that goes hand in hand with a great budget. Once you have allocated money to your emergency savings, move on to aggressively tackle that considerable debt, even though it is at a low interest rate. Start by stopping -- stopping any additions to that debt, that is! While it may be tempting to add to your debt, since you have favorable terms, try to resist. Your creditors will be throwing easy credit at you and your good credit score, but your goal is to live within your means.

When you are living within -- or even better, below -- your means, you will have the resources available to make your goals a reality without worrying about how you will pay for them.

After you do your work on establishing an emergency savings fund and have a plan in place to pay off that considerable debt, I say, "Let the fun begin!"

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of "Credit Repair Kit for Dummies." Visit MMI for additional debt advice or to ask a question of the Debt Adviser, go to the "Ask the Experts" page and select "debt" as the topic.

Good luck.

Bankrate.com's corrections policy -- Updated: Dec. 29, 2006
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