Dear Readers: I've been getting a lot of questions from people facing serious financial difficulty. They've maxed out their credit and taken loans against their 401(k)s.
If this sounds like you or someone you know, take heart. First, realize you're not alone. Then follow these basic steps to start retaking financial control. — Carrie
UNDERSTAND WHERE YOUR MONEY IS GOING
You can't control your money if you don't know where it's going. So take out pen and paper and do some honest calculations. Make two lists: 1) your essential monthly living expenses and 2) the things you spend money on each month but can live without. Put dollar figures against the items in each list, add them up and subtract the total from your monthly income. Now take a look at where you are:
• If on paper it looks like you have enough to cover both lists but you're still going into debt, take a harder look. Go back and add in any extras that are causing you to overspend.
• If you come up short, look first at list 2. These are the nonessentials. What expenses can you eliminate What can you postpone?
• If you don't have enough monthly income to cover your list of essentials, don't despair. You need to re-evaluate and rethink. Can you reduce some costs by renegotiating cell phone or Internet fees, using public transportation or taking your lunch to work?
Another thought: If you just can't make the numbers work, some major changes like downsizing your living space or driving a less costly car may be necessary. You might also consider who in your family can take on an extra job.
COMMIT TO CASH
You'll never get out of debt as long as you always pull out the plastic. Keep a credit card exclusively for emergencies. Make a commitment to only buy something when you have the money in your wallet. This way, you'll think more carefully about each purchase.
Another thought: Even a debit card, which can seem like cash, can get you into trouble. While it may be more convenient, fees and charges can subtly eat away at your money.
SYSTEMATICALLY PAY DOWN DEBT
Once you stop building up debt, you can begin to pay it down. Here are some ways to get started:
• If you have several credit cards or unsecured loans, focus on the highest interest debt first, while paying the minimum on the others.
• Consider consolidating your debts into a home equity line of credit if that's available to you. It's easier to pay off one debt — and it could possibly be tax deductible.
• Transfer your balances to one lower interest credit card and pay the maximum you can afford every month.
Another thought: If you need additional help, approved nonprofit counseling agencies such as the National Foundation for Credit Counseling (www.nfcc.org) and the Association of Independent Consumer Credit Counseling Agencies (www.aiccca. org) can help you find a counselor in your area for little or no cost.
DON'T RAID YOUR RETIREMENT ACCOUNTS
A loan against your 401(k) can seem like a logical solution to a financial crisis, but it's important to do this cautiously, if at all. Generally, 401(k) loans must be paid back within five years. If you don't follow your plan's repayment schedule, the loan could be considered a “distribution” subject to income tax and a 10 percent penalty if you're under 59 1/2.
If you lose your job, in many cases, you have to pay back the loan at termination or within 60 days. Otherwise, the outstanding balance could be considered a distribution, again subject to taxes and penalties.
If a 401(k) loan is your only option right now or you've already taken one, my advice is to pay it off on time — and don't be tempted to take another one.
Another thought: Consider how a 401(k) loan diminishes your retirement savings. First, you lose the potential taxdeferred growth of your savings.
Then you pay the interest on your loan with after-tax dollars. And you pay taxes on that money again when you withdraw it for retirement.
PUT WHATEVER YOU CAN ON AUTOMATIC — INCLUDING SAVING
Make it easy on yourself by setting up automatic payments for whatever you can: rent, utilities, insurance, credit cards. If you can swing it, have a certain dollar amount automatically transferred to your savings account. The more automatic you make paying your bills, the more certain you'll be that they'll be paid on time. Then your primary concern will be to make sure there's enough money in your account to cover the automatic payments.
Another thought: While saving may seem impossible when struggling to make ends meet, try to tuck away a little each month.
You can e-mail Carrie at