Financial Literacy 2007 - Budgeting
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smart spending
Secrets to creating a budget

Strategically pay down expensive debt

Financially speaking, of course, you'll never get ahead if you don't also implement a plan to pay down your debt. Interest payments made to credit cards not only cost you big, but also deny you the ability to apply that money toward savings or entertainment.

"I approach it from an investment point of view," says Weil. "Not having to pay interest is the same, economically, as earning interest. So not having to pay credit card interest is like earning 18 percent."

According to Myvesta Foundation, the average American carries $2,328 in credit card debt, spread out over 2.9 cards.

Conventional wisdom maintains that consumers with multiple credit card balances should tackle the card with the highest interest rate first, while continuing to make minimum payments on their other cards. Once the first card is paid off, focus on the next highest rate card.

Tehan contends, however, some debt-laden consumers get a psychological boost by paying off the smaller balances first. "Paying off your highest rate card first makes sense because it saves you the most money, but if you have several smaller cards it can be easier psychologically to get those out of the way first. That way you can see some immediate progress, which gives you a little boost," says Tehan.

The secret to paying off debt is to determine how much you can afford to send each month and make those payments consistently.

"It's important to keep sending the maximum amount you can afford to send," says Tehan. "Some people make the mistake of reducing the amount they send when they see their payments going down."

Build a safety net

No matter what your debt situation, you should also begin saving for a rainy day.

Financial planners recommend setting aside three- to six-months' worth of living expenses into an emergency fund, in case you or your spouse lose a job, fall ill or get hit with an unexpected bill.

"It's important to set aside savings while you're paying off debt," says Tehan. "It may sound backward, but if you don't have an emergency account and you pay down your credit cards for six months and then an emergency pops up, all the progress you have made is going to be instantly wiped out."  

The most painless way to save, of course, is to set aside any financial windfalls you receive, such as bonuses, tax refunds or yearly raises. You could also try saving your change or any $1 bills that find their way into your wallet.

Live within your means

Learning to live within your means is a simple matter of spending less than you make. For most consumers, that means cutting back. It does not mean doing without.

According to Siesta, there are dozens of ways to reduce your monthly expenses without crimping your lifestyle.

Live within your means
  • If you're paying multiple credit cards, consider rolling the balances over to a lower rate card, taking note of any introductory rates that may expire.
  • Still have an adjustable-rate mortgage, or ARM? If you're planning to stay put, it's time to refinance to a fixed mortgage before interest rates climb any higher.
  • If you're paying private mortgage insurance, or PMI, check to see if it can be canceled. Under the Homeowners Protection Act of 1998, servicers are required to automatically terminate PMI on loans originated after July 29, 1999, when the loan is paid down to 78 percent loan-to-value, which means you have 22 percent equity in your home. In some cases, you can request PMI cancellation when your equity reaches 20 percent.
  • Slash health-care costs by ordering generic medications through a mail-order pharmacy. "If you're taking a medication regularly, you can save a lot of money using a mail-order service," says Siesta, noting consumers should consult their medical plans first.
  • Depending on your family's needs and comfort zone, you can also save big by raising the deductibles on your home and auto insurance.
  • Don't be afraid to play hardball. Many consumers today continue to pay more than they should for cable TV, Internet service and local and long-distance phone plans. By approaching your current providers with more competitive offers and a threat to switch teams, you can often significantly lower the rates you pay.
  • It's equally important to pay your bills on time. Not only will you avoid late fees, but you'll keep your credit score clean, which rewards you with the best possible rates on future loans.

And above all else, stop trying to keep up with the Joneses. Your neighbors with the latest clothes and luxury cars may be drowning in debt, and while you may not sport a designer watch, you will be able to sleep at night.

"Being in control of your finances not only saves you money, but it also makes you a more financially secure person and family," says Tehan.

What's your experience with budgeting? Are you struggling? Successful? Share your story.

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