Money Makeover By Dorothy Rosen, "The Dollar Diva" • Bankrate.com

Money Makeover: Getting out of debt, one day at a time

Maureen Kinsey works hard. She's a marketing assistant during the day, a fitness instructor at night and a consummate consumer on the weekends. "I am undeniably a shopoholic, and feel sick with guilt when I charge things I can't afford," Maureen tells the Diva. "I deal with stress by shopping and I'm getting deeper and deeper in debt."

Maureen lives beyond her means. She brings in $2,430 a month and spends $3,260; that's an $830 deficit. By bailing her out when the going gets tough, her generous family members have become unwitting enablers.

Getting out of debt and achieving financial independence are high priorities for Maureen. She's 30 years old and knows that it's time to cut the cord, but she doesn't know how. The Diva is going to help her find the way.

Looking for love in all the wrong places
Maureen has a penchant for rubbing shoulders with the rich and famous at fancy social events. She can't afford the expensive wardrobe needed for these events, but is too proud to admit it when the invitations roll in. Rather than decline, she uses plastic to fund this folly. "One of my problems is trying to keep up with the Joneses," she admits. The Diva reminds her that those "Joneses" are wealthy, and there's no way she can keep up with them on her relatively meager $2,430 monthly income.

The Diva chides Maureen: There is no ball so special that it's worth jeopardizing your health and self-esteem over. If you don't have the money, just say no. The right "Mr. Right" wouldn't have it any other way.

$10,000 of Maureen's debt comes from money her mom and grandma spent for a wedding that didn't happen. It's a debt Maureen takes seriously. Pressured by his wealthy family, the groom-to-be backed out at the last minute; apparently, his family didn't think the bride-to-be was good enough. Nonrefundable deposits were made, nonreturnable wedding finery was purchased. Maureen, her mom and grandma were left holding the bag.

The groom-to-be canceled the event, but assumed no responsibility for the thousands of dollars that were spent in preparation for the big day. Good riddance to bad rubbish.

Tracking the expenses
Maureen spends $830 a month more than she earns. Here are the adjustments needed to bridge the gap and add $30 a month to her debt payments:

• Housing (-$50): Maureen's mother owns the apartment she lives in, and has reduced the rent $50.
• Medical (-$60): Eliminate nonessential medical treatments.
• Telephone (-$20): Make fewer long distance calls.
• Dry cleaners (-$10): Spot clean and hand wash garments.
• Movies (-$20): Attend less expensive matinees.
• Dining out (-$40): Eat less expensive meals in company cafeteria.
• Nightclubs (-$40): Stretch out drinks when visiting clubs.
• Clothes (-$280): Stop shopping.
• Bath products/cosmetics (-$60): Kiss the Avon lady goodbye.
• Books (-$50): Read the stockpile of unread books.
• Gifts (-$20): Use craft skills to make inexpensive, thoughtful gifts.
• Pet expense (-$20): The cat needs to go on austerity, too. No more expensive toys and goodies.
• Vacations (-$190): Moratorium on expensive vacations until debts are paid off.
• Debt payments (+$30): Make payments on income tax debt.

Shopping substitution
Maureen is committed to cutting her expenses and getting her debts paid off, but wonders: What does a gal do on the weekends if she can't shop? Here are some ideas:

• Furniture design: Maureen loves to transform discarded thrift-shop furniture into objects d'art. Stripping, sanding and refinishing takes time, and time is what she needs to fill. Since several folks have expressed an interest in her designs, she's may be able to make some money while she's at it.
• Yoga and Pilates classes: As a fitness instructor, Maureen can take as many classes as she wants for free. Yoga and Pilates classes relieve stress, promote health -- and fill weekend time.
• Present fitness workshops: Fitness workshops bring in extra cash. She should come up with something new and different to make her workshops the talk of the town. Developing the new program will take time and creativity; success will bring in cash.
• Picnic in the park: Taking a sandwich and a good book to the park will let Maureen enjoy the great outdoors while expanding her mind.
• Look for a new job: Maureen works for a nonprofit agency and believes she can do better elsewhere. Looking for a job takes time and more money means getting out of debt faster. She needs to put job-hunting on the front burner.
  Monster.com is a job-hunter's paradise. On top of job listings, advice on resume writing and fielding interview questions, the site offers a personality quiz fashioned after the renowned Myers Briggs Type Indicator test. Maureen can use the test to gain an insight into her personality type (introvert/extrovert) and even find suggestions for jobs that folks with her personality might enjoy.

Paying off the debt
Maureen owes $8,600 to credit card companies and $800 in back taxes. Using the Diva's "payment push" strategy, she can pay these debts off in less than two years -- even sooner if she succeeds in making more money. Once that debt is history, she will start paying mom and grandma back the $10,000 they spent on the aborted wedding, and be totally debt free in less than three and a half years.

With the "payment push" strategy, a moratorium is put on nonessential spending. Every effort is made to bring in more money, and all extra cash that comes in is used to pay down debt.

Here's how the "payment push" strategy will work for Maureen:

1. She will make a schedule of debts including: (1) debt name, (2) balance due, (3) interest rate, (4) time period for the "payment push" and (5) how to fund the "payment push."
2. MasterCard has the highest interest rate. It gets paid off first, followed by the back taxes. These two debts will be history in seven months.
3. Her $8,000 American Express bill is next. Its 4 percent teaser rate expires in six months and jumps to 19 percent. Maureen needs to find a better deal. The national average credit card rate has fallen below 15 percent, and people with good credit can find even better deals using Bankrate's credit card search engine. At the 19 percent rate, this debt will be gone by June 2003.
4. The $490 that's freed up when the Amex bill is paid off will be used to pay back mom and grandma.

Maureen has $9,000 in a mutual fund -- a gift from her mom and stepfather. She's tapped this fund in the past to pay bills, but forgot to change her lifestyle, and the bills came back with a vengeance. Rather than tap the fund again, she wants to pay her debts out of current income. By cutting expenses and figuring out a way to bring in more money, she can make it happen.

Conclusion
Heavy debt accumulation is often driven by psychological factors such as anger and depression. Maureen's experience with individual psychological counseling was negative; if she can't lick the shopping habit alone, the Diva suggests that she investigate support groups, such as Debtors Anonymous. DA is a 12-step program fashioned after Alcoholics Anonymous. Its mission is to help compulsive spenders achieve solvency one day at a time.

Maureen is prepared to make the sacrifices necessary to get her financial house in order. If the pull to shop consistently overpowers her desire to be solvent, she is prepared to seek nonfinancial help to keep herself on track. With that kind of resolve, she's bound to be successful.

Success is a journey, not a destination. The Diva wishes Maureen the best of luck on the road to financial freedom. The Money Makeover is a weekly feature of Bankrate.com in which money experts help readers untangle their finances. Do you need to get your financial house in order? Could you benefit from the guidance of a customized financial plan? If so, click here to enter the Money Makeover contest! To read more makeovers about people just like you, click here.

-- Posted: Sept. 21, 2001