Step 1: Gather Information
Before forming a debt-reduction plan, you must gather all your financial information and records so you can form a solid picture of your monetary situation. While the picture might not be pretty, careful preparation can lead to more solutions for shedding the debt.
Here's what you need to gather:
• Account information on all credit cards, accounts and loans that include debtor, amount owed, date of last payment, minimum payment, interest rate charged, address and telephone number.
• Asset information on all family holdings including type of holding or property, current value, rate of return, maturity dates, cost/tax basis.
• Monthly living expenses: Categorize all expenditures and try to avoid the use of "miscellaneous" as a catchall for unmonitored spending.
• Insurance coverage including individual and employee benefits and detail the type(s) of policy, cost, coverage and rationale behind whether or not to continue coverage.
Step 2: Develop a Bare Bones Budget
Once you have a sense of all the debts, create a realistic budget to live on that eliminates all frivolous spending. Be sure to include spouses and family members when forming the budget to enhance the likelihood of cooperation and success.
Create new spending habits that include:
• Making a list of what is needed before going shopping
• Tracking monthly expenditures on a regular basis
• Reconciling the checkbook monthly
• Recording or saving receipts for all cash purchases
• Using the payroll deduction option to bolster monthly payments and savings
Step 3: Make It a Family Affair
Be sure to write down all the new spending habits and establish target dates to savings goals.
Meet with your spouse and family members regularly to evaluate progress, identify any weak areas and plan for upcoming events that may require a change to the budget.
It's also a good idea to write down all the money coming in and going out to make it easy to identify unnecessary spending. Try and cut back visits to the ATM—this source of cash is often abused and is more difficult to track than check writing. If you do not know where the money is going, you cannot plug the leaks.
Step 4: Contact Creditors
Once you have identified your debts, it is a good idea to contact creditors to set up payment plans that reduce your payments to a more manageable level.
Step 5: Look for Debt-Reduction Sources
Next, brainstorm a way to shore up any monies available to quickly reduce as much debt as possible so you aren't losing so much money to interest charges.
Here are some common sources of funds:
• Analyze net monthly income and make adjustments: Alter the number of exemptions claimed, automatic deductions, 401(k) contributions, savings bond purchases, etc...
• Review assets and re-allocate to create liquidity: When interest charges are in excess of earnings on invested monies, check to see if you qualify for tax deductions.
• Consider a temporary second job to increase income; a non-working spouse or other non-working family members could also be encouraged to seek outside employment.
• Secure a loan from a family member. The loan could be repaid at an interest rate far less than the credit card or other loan interest rates, but still higher than the family member would be earning on certificates of deposit or money market accounts.
Step 6: Develop Emergency Cash Reserves
It's important to create a rainy day fund to cover any unexpected expenditures; commit to stashing away a realistic amount of money every month and slowly increase the amount each month. The end goal is to accumulate three to six months of living expenses.
You may need to refer back to your bare-bones budget in order to set your goal.
Step 7: Plan Mid-Term and Long-Term Financial Goals
As you continue to pay down debt and begin to feel more optimistic about your finances, start detailing your long-term goals and develop plans on how to achieve them on your new financial diet.
'My Biggest Money Mistake'
Everybody has messed up at some point. These folks share their biggest goofs, but are now on the right path.
Bought a Vacation Home as an Investment
Christine Flood, 37
Software engineer
Denver, Colorado
Courtesy: Christine Flood
"I have been in the rental market since I was in college and thought owning a ski condo would be a good idea. What I didn't know is that vacation rentals are a whole new beast that I didn't understand.
The operational costs differ greatly -- for example, you need to hire a management company for guest services and housekeeping. That's 30% to 50% of your gross rents. And my vacation home is now worth $30,000 less than when I bought it."
My fix: "My dad told me vacation homes are a rich man's game -- I should have believed him. When the market turns around, I am going to sell this baby as quickly as possible and settle with a traditional rental."
Courtesy: Daniel C.
Kept Too Much Money in Employer's Stock
Daniel C., 52
Engineer and consultant
Glen Ellyn, Illinois
"I had over 10% of my net worth in a single equity -- my employer's stock, and held on to it even when the market went south. I held on to it out of sentiment because it was my own company. In 2010, $50,000 worth of stock turned into a $27,000 tax loss."
My fix: "I know not to invest with sentimentality, and I pay more attention to my portfolio."
Courtesy: Phyllis Goodman
Trusted a Pro's Picks and Ignored Fund Fees
Phyllis Goodman, 63
Retired
Fort Worth, Texas
"After retiring, I rolled my 401(k) over to the company that had serviced my insurance needs for more than 30 years and blindly took the agent's recommendations without researching management fees or the funds. I lost money and was charged a great deal."
My fix: "I withdrew the money, started doing research on my own, and invested at Vanguard and T. Rowe Price. I manage my own accounts, insist on diversity, and do everything I can to stay up to date."
Courtesy: Sin Hang Lai
Too Risk-Averse for My Age
Sin Hang Lai, 33
Project manager
Cos Cob, Connecticut
"When I quit my job in 2002, I converted my 401(k) into a IRA at a brokerage and left it in cash for the next seven years. I wish I had invested that money during the strong post-dotcom recovery. It wasn't until after 2008 that I thought about what to do with my savings, and then I stupidly tried to trade and lost money."
My fix: "I regret not having a personal finance education, either formally or through friends and family, so now I read, observe, and carefully manage my own money. I've opened a Roth IRA and an individual account I play with -- I let myself get creative with that account."
Courtesy: Paul Jarvis
Put Short-Term Savings into Growth Stocks
Paul Jarvis, 29
Money manager
Fargo, North Dakota
"I was 16 when my father passed away nearly 15 years ago. I inherited the house and a life insurance policy, which combined would have been enough for college and hopefully a payment. I followed my broker's advice and invested the life insurance money in a growth portfolio. The market dropped substantially over the next year, and while it eventually came up, I needed the money for tuition and couldn't afford market fluctuations."
My fix: "I think about my short-term needs and balance that with long-term money, which can take additional risk. I rebalance my portfolio in large market declines, as well as cut extraneous expenses and save aggressively."
Bought a Vacation Home as an Investment
Christine Flood, 37
Software engineer
Denver, Colorado
Courtesy: Christine Flood
"I have been in the rental market since I was in college and thought owning a ski condo would be a good idea. What I didn't know is that vacation rentals are a whole new beast that I didn't understand.
The operational costs differ greatly -- for example, you need to hire a management company for guest services and housekeeping. That's 30% to 50% of your gross rents. And my vacation home is now worth $30,000 less than when I bought it."
My fix: "My dad told me vacation homes are a rich man's game -- I should have believed him. When the market turns around, I am going to sell this baby as quickly as possible and settle with a traditional rental."
Courtesy: Daniel C.
Kept Too Much Money in Employer's Stock
Daniel C., 52
Engineer and consultant
Glen Ellyn, Illinois
"I had over 10% of my net worth in a single equity -- my employer's stock, and held on to it even when the market went south. I held on to it out of sentiment because it was my own company. In 2010, $50,000 worth of stock turned into a $27,000 tax loss."
My fix: "I know not to invest with sentimentality, and I pay more attention to my portfolio."
Courtesy: Phyllis Goodman
Trusted a Pro's Picks and Ignored Fund Fees
Phyllis Goodman, 63
Retired
Fort Worth, Texas
"After retiring, I rolled my 401(k) over to the company that had serviced my insurance needs for more than 30 years and blindly took the agent's recommendations without researching management fees or the funds. I lost money and was charged a great deal."
My fix: "I withdrew the money, started doing research on my own, and invested at Vanguard and T. Rowe Price. I manage my own accounts, insist on diversity, and do everything I can to stay up to date."
Courtesy: Sin Hang Lai
Too Risk-Averse for My Age
Sin Hang Lai, 33
Project manager
Cos Cob, Connecticut
"When I quit my job in 2002, I converted my 401(k) into a IRA at a brokerage and left it in cash for the next seven years. I wish I had invested that money during the strong post-dotcom recovery. It wasn't until after 2008 that I thought about what to do with my savings, and then I stupidly tried to trade and lost money."
My fix: "I regret not having a personal finance education, either formally or through friends and family, so now I read, observe, and carefully manage my own money. I've opened a Roth IRA and an individual account I play with -- I let myself get creative with that account."
Courtesy: Paul Jarvis
Put Short-Term Savings into Growth Stocks
Paul Jarvis, 29
Money manager
Fargo, North Dakota
"I was 16 when my father passed away nearly 15 years ago. I inherited the house and a life insurance policy, which combined would have been enough for college and hopefully a payment. I followed my broker's advice and invested the life insurance money in a growth portfolio. The market dropped substantially over the next year, and while it eventually came up, I needed the money for tuition and couldn't afford market fluctuations."
My fix: "I think about my short-term needs and balance that with long-term money, which can take additional risk. I rebalance my portfolio in large market declines, as well as cut extraneous expenses and save aggressively."
Things Your Neighbors Won't Tell You
The people living next door aren't who you think they are.
1. "Complaining will cost you dearly."
When Richard Laermer and his partner moved into a Manhattan co-op, his next door neighbor invited them over to dinner. "We had a lovely wine-infused time," recalls Laermer, a PR executive. But those good times didn't last. A few short weeks after breaking bread, Laermer left a Post-It note on the neighbor's door asking if her kids could be quieter in the mornings. The neighbor responded by cutting off all contact.
2. "I will use your Wi-Fi -- and get you arrested."
Nearly one-third of Americans admit to using their neighbor's Internet service, nearly double the number from two years ago, according to a national survey by the non-profit Wifi Alliance Trade Alliance. Such thieving can push your data usage above its monthly limit and increase your Wi-Fi bill, says McCall Butler, a spokeswoman for AT&T, who recommends that customers protect their Wi-Fi network with a password and change it regularly. Worse, there's no controlling what Wi-Fi thieves do with your signal, and if what they're doing is illegal, you could be in hot water.
3. "Good luck blocking out our din."
Unofficially, the biggest complaint people have about their neighbors is noise, says Bob Borzotta, who has conducted online polls on the issue at his website NeighborsFromHell.com. That includes barking dogs, loud music, car and house alarms and domestic arguments. And these aren't the constant complaints of a neighborhood killjoy. "I know two people who ended up having intestinal surgery because of anxiety related to long-running disputes with neighbors over noise," Borzotta says. Lost sleep and noisy neighbors can mean hefty doctor's bills to deal with anxiety and stress. People who suffer from psychological distress spend an average of $1,735 more on health care each year than lower-stress folks, according to research published last month by researchers at the Medical University at South Carolina. Another option -- soundproofing -- can cost $200 for one wall between you and the noisy neighbor and $300 for the ceiling, according to Ted White, president of the Michigan-based Soundproofing Company. Soundproof Windows range from $350 to $900 per window, according to Reno, Nevada-based Soundproof Windows Inc.
4. "I'm a registered sex offender."
For obvious reasons, this may be the last thing in the world your neighbor will tell you, but it's important, even for people who don't have children. Thanks to the Sexual Offender Act of 1994, also called "Megan's Law," people convicted of sex crimes must notify local law enforcement of any change of address or employment post-prison. That information is then made public, via the National Sex Offender Registry. And as would-be home buyers use these tools right along with Zillow to evaluate their future neighborhoods, the presence of a convicted sex-offender can hurt property values. A study by the researchers in Longwood College and Longwood University in Virginia said that registered sex offenders living nearby can reduce your home's value by 9% and homes near registered sex offenders can take over 70% longer to sell.
5. "We're ripping up the flower beds and planting corn."
Forget Farmville. About 43 million Americans now grow their own fruits, vegetables, berries and herbs, according to a 2009 National Gardening Association report, up 19% over the previous year. But what's good for the farmer isn't necessarily so good for his neighbors. A Virginia Tech study from 2009 suggested that landscaping and pristine lawns help increase property values by an average of 7.5%. A home valued at $150,000 with no landscaping could be worth up to from $8,000 to $19,000 more with a sophisticated landscape with color and large plants, the study said: "Relatively large landscape expenditures significantly increase perceived home value and will result in a higher selling price than homes with a minimal landscape."
6. "My apartment has bed bugs."
It only takes one embarrassed and silent neighbor with a mattress full of bed bugs to infect an entire apartment building. In one recent study, the arrival of a single suspected bedbug resulted in infestation in 45% of the units in a 233-unit apartment building within three years. Getting rid of the pests is hard -- it may take several cycles of extreme extermination, and around $550 for a typical one-bedroom apartment, according to San Francisco-based exterminator Dan Fitzsimmons.
1. "Complaining will cost you dearly."
When Richard Laermer and his partner moved into a Manhattan co-op, his next door neighbor invited them over to dinner. "We had a lovely wine-infused time," recalls Laermer, a PR executive. But those good times didn't last. A few short weeks after breaking bread, Laermer left a Post-It note on the neighbor's door asking if her kids could be quieter in the mornings. The neighbor responded by cutting off all contact.
2. "I will use your Wi-Fi -- and get you arrested."
Nearly one-third of Americans admit to using their neighbor's Internet service, nearly double the number from two years ago, according to a national survey by the non-profit Wifi Alliance Trade Alliance. Such thieving can push your data usage above its monthly limit and increase your Wi-Fi bill, says McCall Butler, a spokeswoman for AT&T, who recommends that customers protect their Wi-Fi network with a password and change it regularly. Worse, there's no controlling what Wi-Fi thieves do with your signal, and if what they're doing is illegal, you could be in hot water.
3. "Good luck blocking out our din."
Unofficially, the biggest complaint people have about their neighbors is noise, says Bob Borzotta, who has conducted online polls on the issue at his website NeighborsFromHell.com. That includes barking dogs, loud music, car and house alarms and domestic arguments. And these aren't the constant complaints of a neighborhood killjoy. "I know two people who ended up having intestinal surgery because of anxiety related to long-running disputes with neighbors over noise," Borzotta says. Lost sleep and noisy neighbors can mean hefty doctor's bills to deal with anxiety and stress. People who suffer from psychological distress spend an average of $1,735 more on health care each year than lower-stress folks, according to research published last month by researchers at the Medical University at South Carolina. Another option -- soundproofing -- can cost $200 for one wall between you and the noisy neighbor and $300 for the ceiling, according to Ted White, president of the Michigan-based Soundproofing Company. Soundproof Windows range from $350 to $900 per window, according to Reno, Nevada-based Soundproof Windows Inc.
4. "I'm a registered sex offender."
For obvious reasons, this may be the last thing in the world your neighbor will tell you, but it's important, even for people who don't have children. Thanks to the Sexual Offender Act of 1994, also called "Megan's Law," people convicted of sex crimes must notify local law enforcement of any change of address or employment post-prison. That information is then made public, via the National Sex Offender Registry. And as would-be home buyers use these tools right along with Zillow to evaluate their future neighborhoods, the presence of a convicted sex-offender can hurt property values. A study by the researchers in Longwood College and Longwood University in Virginia said that registered sex offenders living nearby can reduce your home's value by 9% and homes near registered sex offenders can take over 70% longer to sell.
5. "We're ripping up the flower beds and planting corn."
Forget Farmville. About 43 million Americans now grow their own fruits, vegetables, berries and herbs, according to a 2009 National Gardening Association report, up 19% over the previous year. But what's good for the farmer isn't necessarily so good for his neighbors. A Virginia Tech study from 2009 suggested that landscaping and pristine lawns help increase property values by an average of 7.5%. A home valued at $150,000 with no landscaping could be worth up to from $8,000 to $19,000 more with a sophisticated landscape with color and large plants, the study said: "Relatively large landscape expenditures significantly increase perceived home value and will result in a higher selling price than homes with a minimal landscape."
6. "My apartment has bed bugs."
It only takes one embarrassed and silent neighbor with a mattress full of bed bugs to infect an entire apartment building. In one recent study, the arrival of a single suspected bedbug resulted in infestation in 45% of the units in a 233-unit apartment building within three years. Getting rid of the pests is hard -- it may take several cycles of extreme extermination, and around $550 for a typical one-bedroom apartment, according to San Francisco-based exterminator Dan Fitzsimmons.
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