Tackling deficit spending one
bill at a time
Sandra Lawrence is a 38-year-old divorced legal secretary
who lives in California with her 18-year-old son. Life is rich with
family, friends and hobbies: She plays the flute, attends concerts,
reads, entertains and takes off on weekend jaunts. She also went
to New York and Honduras last year; two trips she could ill afford.
Sandra does not earn enough to support her current
lifestyle. "I've been steadily digging myself deeper and deeper
in a hole over the past few months," she laments. "I wonder
if I should just clean out the mutual funds in my retirement account
to pay off the debt, and start all over again with a clean slate."
The Diva responds with the following reasons why Sandra should not:
- Expect to take a beating when you sell in a down
market; the market is currently down.
- Taxes and penalties will cost so much you'll end
up with a pittance.
- You wiped the slate clean in 1997 with a bankruptcy,
and you're right back where you started.
- Robbing from the future to pay for the past is
a short-term fix and a long-term fallacy.
Sandra spends $880 a month more than she earns and
has more than $24,000 in unsecured debt. "It looks hopeless
to me," she laments. The Diva begs to differ.
Tracking the expenses
Sandra filed for bankruptcy four years ago, but forgot to change
her spending habits. "I'm susceptible to impulse buying,"
she confesses, "and just bought some high-tech meditation CDs
for $150. They have a one year money-back guarantee." The Diva
told her to send them back and get a refund; they're not in the
budget.
Sandra also goes along with the crowd, even when she
can't afford to. Worse, she's the one who whips out her wallet when
the bill arrives, while her compatriots stand around whistling "Dixie."
Sandra is a giver who needs to stop hanging out with takers and
needs to learn how to say "no" to activities she can't
afford.
Sandra is ready to make the lifestyle changes necessary
to turn her fortunes around. The Diva suggests the following:
- Housing (-$400): Collect
rent from grown son and rent a room to a student.
- Car expense (-$20):
Walk more, drive less.
- Medical (-150): Hold
off on elective treatments until debts are paid off.
- Telephone (-$10):
Substitute e-mails for long distance calls.
- Utilities (-$20):
Practice conservation.
- Dry cleaners (-$10):
Wash and wear; spot clean; spritz with hot water to get wrinkles
out.
- Recreation (-$70): Bare
bones until debts are paid off.
- Dining out (-$50):
Make chai tea at home instead of paying $2.25 a cup outside; plan
meals and cook in bulk.
- Charity (-$50): Reduce
until debts are paid off.
- Books (-$50): Go to
library instead of bookstore.
- Gifts (-$20): Small
gifts, large love notes.
- Vacations (-$150):
Limit travel to weekend trips.
- Son living with dad (-$20):
Limit cash outlays to visits and clothes.
- Investing (-$100):
Pay off debts before investing.
The spending cuts will shave $1,120 off Sandra's monthly
expenses; $880 will end the deficit spending; $240 will help her
pay off the debt and save for emergencies and big-ticket purchases.
Paying off the debt
Sandra has the following debt:
- Credit card: $720 at 18.2 percent (current payment,
$200)
- Student loan: $23,600 at 6.5 percent (current payment,
$160)
By adding the $240 saved from belt tightening to the
current $200 payment, the credit card debt will be paid off in two
months; $440 will then be freed up for saving ($200) and paying
off the student loan ($240).
The current $160 monthly student loan payment will
keep Sandra shackled to the debt for 25 years and cost her $25,000
in interest payments. By adding $240 to the payment when the credit
card is paid off, the student loan will be history in six years,
and she'll only pay $5,000 in interest.
Moonlighting for another attorney put a couple of
hundred dollars in Sandra's pocket this year. If she can drum up
enough side work to net an additional $100 a month and apply it
to the student loan she'd save another $1,200 in interest and be
debt free in four and a half years. The Diva thinks it's worth hustling
for.
Saving money
Starting Jan. 1, her belt-tightening will give her $200 a month
to put in savings. The Diva suggests that she buy Series
I U.S. savings bonds. They're safe, the rates are good, they
can be redeemed after six months, and she can purchase them online
on the U.S.
Treasury Web site.
Buying a car
Sandra drives an '84 Volvo with 204,000 miles on it; she'd like
to trade it in next year for something that gets better gas mileage.
Her target price for a used car is $4,000-$5,000. Here's how she
can pay for it:
- Tax refund: $2,000-$3,000
- Sale of Volvo: $1,000
- Sale of old flute: $500
- Savings ($200/month): $1,500
Conclusion
"The Money Makeover has been unbelievably helpful!" Sandra
exclaims. "I was freaking out about paying off the student
loan for the rest of my life; knowing it can be paid off in six
years or less has taken a lot of the pressure off."
To make sure she's doing it right, Sandra is going
to the "envelope" method of budgeting for a few months.
She will label each envelope with an expense category, and record
the monthly amount to be deposited in each one. When she cashes
her paycheck, she'll put the budgeted amount of cash into each envelope,
and draw from them as needed.
When there's money left over in an envelope at the
end of the month, she'll write the date and amount on the outside,
and put the cash in savings so she's not tempted to reallocate or
spend it. With that kind of resolve, the Diva expects Sandra to
put a halt to the deficit spending immediately and get into a positive
net worth position sooner rather than later.
Success is a journey, not a destination. The Diva
wishes Sandra 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: Nov. 2, 2001
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