Lend an ear to debt advice you should hear

Dear Debt Adviser,
I am writing you out of exasperation. I don’t know what to do next. I borrowed against the equity in my home and spent the money. Currently, I can pay only the interest on my mortgage, which is $290 a month. But I have other major credit problems. I am upside down on my car loan, for instance. Furthermore, I have taken out four loans against my 401(k) plan. Making matters worse, I have no savings or emergency fund. I make a good income at a factory. I get a salary of $28 per hour. But I don’t know where to go from here.
— Brenda

Dear Brenda,
Where there is borrowing, there is spending and you, my dear, are in desperate need of a spending plan. What you may not have noticed is that you are standing on the edge of a financial cliff and are about to tumble over the side. All of your credit lines appear to be maxed out. You’re consuming all of your income. You have no savings. It would take only a small setback to push you over the edge. A loss of overtime, a cut in pay or a layoff would be disastrous for you in your current overextended position.

But it is never too late to get things going in the right direction. You just need to start doing things differently — immediately. First, I want you to rein in your spending. For the next three months, I recommend that you spend only on necessities. That would be defined as payments for your mortgage, car, insurance and utilities. Limit your purchases to gasoline and food.

I also recommend that you reconsider whether all of your “necessities” really are. For example, if you are spending money on a land line and a cellphone, drop one. If you have premium cable, cut back to basic. Consider the savings of adjusting your thermostat a couple of degrees. Dine in, not out. If you visit the gambling tables from time to time, stop it now. You get the idea.

Next, I want you to determine why you have burned through a home equity loan and four 401(k) loans. If the answer is that you are living well beyond your means, and don’t have enough income to pay for necessities, then you have some major changes to make. If someone else is helping you spend your money, please suggest that they find another hobby. As you have found, you cannot support a lifestyle that you are unable to fund for very long before things begin to seriously unravel.

I suggest that you speak with a consumer credit counselor to get some unbiased advice. Your counselor will go through your expenses and recommend adjustments to better fit your income. If it is possible to balance your spending and income, your counselor will find a way to do so. You can find a qualified, nonprofit counselor at the websites of the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.

Alternatively, you can work up a spending plan on your own. To do this, you’ll need to set some goals for yourself. You need to determine how much of your income is needed to satisfy your monthly expenses. And you must pinpoint where it is currently going instead.

Then begin to build an emergency savings account. Eventually, it should grow to six to 12 months’ worth of your basic living expenses. Without an emergency account you’ll never be able to get your credit under control. Every bump in the road will require new borrowing.

In addition to emergency savings, you must work out the best plan for repaying your 401(k) loans and your home equity loan. If you change jobs or get laid off, all your 401(k) loans will become due — i.e., payable. If you can’t pay, you’ll have to recognize the loans as income and pay the appropriate taxes and penalties. Not a pretty picture.

It is going to take you some time to clear up this spending mess. But with a steady and persistent plan, you will pay off what you owe, begin saving and soon be in a much better financial position.

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