April is as good a time as any to take a good look at the state of your finances and actually do something about it. It’s the month when federal and state taxes are due, and is known as "Financial Literacy Month."
Budgeting for a Strong Foundation
Let’s start with the family budget – an accurate, working budget is needed. Save all statements, bills, receipts, etc., and figure out where your hard-earned cash is going. Don’t forget to include items like presents, donations, subscriptions, etc. Next let’s look at your goals and savings. If you own a home, that means the budget requires not only an amount for personal savings and retirement contributions, but a separate household maintenance fund, as well as an emergency fund in case your income is ever reduced. Think about all the other things you save for – tuition, vacation, replacing a car, buying a first house or making renovations to an existing home – the list can be long and daunting. Now go back to the budget to see what can be reduced to increase savings.
Managing Your Debt
Most Americans also carry a fair amount of debt. Don’t look away – let’s look at it in detail. If you’re like most people, you probably have revolving credit card debt, with account balances that probably increased substantially in recent years. Those with student loan debt may only be able to make minimum payments at the moment. Let’s look at your options for effectively managing that high-interest credit debt.
Reducing Expenses and Mitigating Risks
If there are enough temporary reductions you can find in your budget to chip away at it, that’s the best strategy. Don’t reduce your retirement contributions, insurance, or home maintenance savings, but just about any other monthly expenditure is worth considering, because remember, the belt-tightening is only temporary.
Borrowing against your home or withdrawing funds from a retirement plan probably are not your best alternatives. Credit card debt is unsecured debt. There is no collateral. If you borrow against your home to pay it off, you’ll have converted your unsecured debt to secured debt, meaning you’ve put your house on the line if you fail to make payments. Withdrawing funds from a retirement account carries an opportunity cost. The withdrawal you make to pay down debt may take a long time to replenish, and during that time the money isn’t there to be invested. In other words, the cost can add up to a lot more than just the funds you withdrew. Let’s try hard to avoid that.
Seeking Professional Guidance for Debt Plans
For anyone whose credit cards are nearly maxed out, or who has only been able to make minimum payments for a long time, talk to MTA Benefits’ nonprofit partner, Cambridge Credit Counseling, about a debt management plan. Rather than settling a debt, which costs a lot more than the 50 cents-on-the-dollar you may be imagining, or taking out a consolidation loan, a debt management plan will allow you to repay your credit card balances in full, but usually at significantly lower interest rates, such as 8 percent, compared to 24 or 25 percent. Debt management plans are usually completed in roughly 41 months, though they can take up to 72 months to make the payments more affordable. A management plan could give your budget the breathing room it needs.
Before another Financial Literacy Month has come and gone, and before the head-long rush to the end of the school year has begun, take a few hours to take control of your finances and create a strategy to reach your financial goals, whatever they may be. You’ll be glad you did.
Visit cambridge-credit.org/mta for more information.
