You're probably already plotting how to spend that nice little tax refund check you'll get this year. A big vacation, perhaps? That great outfit you saw last month? Maybe a down payment on a new car?
Stop right there. You've got to get a grip on yourself and your finances, or you'll never get out of debt. And there's no better time to do it than around tax time, when you're already facing the facts about how much money you made last year and how much debt you have hanging over your head.
Don't bury your head in the sand. You can get out of debt. We talked to three financial experts -- Kim Dignum of Dignum Financial Partners of Fort Worth; David Diesslin of Diesslin & Associates in Fort Worth; and Gail Cunningham with the National Foundation for Credit Counseling -- to find out what you can do to get your head above water.
Here are 10 steps you can take to get on the right track.
1. Use your tax refund to get started
That first step is sometimes the hardest. Use your tax refund to pay off credit cards or get caught up on payments. And don't forget that starting Jan. 1, your paycheck got a little boost because the government reduced the amount it is collecting on Social Security taxes this year. Put those extra dollars to work on your debt.
2. Face the cold hard truth
You need to know where your money is going. Make a list of all your spending. Put the nondiscretionary items such as mortgage, utilities, gasoline and car payments on the left. On the right, list the discretionary spending: movies, lattes, splurges at the department store, eating out. This should involve everyone in the household -- children included.
Set up a spending diary to track your spending for 30 days. "It's analogous to a diet. Write everything down, so when you pick up that Hershey bar you say, 'Oh my God, it's 300 calories.' It's the same thing," Dignum said.
Add up the interest you are paying each month on your credit cards, and you may be amazed how much it is -- $200 a month? $300 a month? That will be money in your pocket once you get out of debt.
"There's nothing as eye-opening as having your spending staring back at you in black and white," Cunningham said.
3. Get back to basics
It sounds simple, but this is where it really gets tough: You have to spend less than you make. Figure out your basic expenses -- the things you must pay monthly. Then you'll know how much you have left over for discretionary spending. Decide what matters most to you and your family, and cut the rest. Don't overlook small stuff: a $5 latte every workday will cost you $1,300 in a year.
"If you've got a problem, the only way to start is with the truth," Diesslin said. "You've got to change your habits."
Here are some areas where you may be able to cut costs:
Eating out: Add up all the credit-card charges and track all those turns through the drive-throughs, and you may be surprised at how much you spend eating out. Set a specific amount you can spend each month and stick to it. Dignum recommends withdrawing money each week for discretionary spending and putting it in an envelope; when it's gone, you're done for the week.
Small-ticket items: Don't overlook small expenditures. Are you spending $1.25 a day to buy a soft drink out of the vending machine at work? That's $325 a year. Buy them in bulk and carry them to the office. If you spend $15 a week eating out for lunch, that's nearly $800 a year.
Phone bills: You may be able to save $80-$100, or more, per month by reducing the cost of services. Can you bundle your phone service with cable or Internet to save costs? Do you really need that land-line phone now that everyone relies on cellphones?
Cable and Internet: Think of bundling these as well. Do you really need all those premium channels? Saving just $10 a month will put $120 a year in your pocket.
4. Look for big savings
Once you've cut the small stuff, look for big savings. Should you refinance your house? Interest rates are still at historic lows, but refinancing isn't free. Closing costs are being wrapped into your new mortgage, and you'll pay interest on those additional costs for the life of the mortgage. A general rule of thumb is this: If you can shave 2 percentage points off your mortgage by refinancing, then it's probably worth it. If you're renting, you may need to consider moving to a cheaper rental. You might be surprised at the deals you'll find. But don't break your lease to do it -- you don't want to lose that deposit. That, too, is money in your pocket.
5. Tackle the credit cards
For most people, credit card debt is the 800-pound gorilla in the room. Look at your credit-card statement -- really look at it! -- and you'll see a note hidden within the bill that shows you how long it will take to pay off the card in full if you just make the minimum payment. It can take years, perhaps decades. So stop using the credit cards -- rely on cash, and if you can't, don't buy. Here are hints for dealing with credit-card debt:
Negotiate for better terms. Call the credit-card companies and tell them that you want to work out a plan for paying off your debt, and ask them to lower your interest rate. Amazingly, they'll do it sometimes.
Figure out which card has the highest interest rate, and tackle that one first. Pay the minimum on all the others, and put all the money you can afford onto the one card you want to pay off. When you finally get it paid off, take that money and apply it to the card with the next highest interest rate. Eventually you'll get them paid off.
Put your credit cards in a drawer at home and don't use them. Don't even look at them. If you keep spending more than you make, you'll never get ahead.
6. Avoid penalties by setting up a cash-flow calendar
Late fees on credit cards and bounced checks at the bank can add hundreds of dollars to your monthly expenses. Figure out why you are late -- many people make late payments month after month because the due date of their bill doesn't coincide with the timing of their paychecks, says Cunningham. Map out a calendar when all bills are due, and figure out how to spread them evenly over a month. If you have too many payments due for one paycheck, call the credit-card company or the finance company and ask to change the due date. Many will be happy to do so.
7. Visit a credit counselor
If all this seems too overwhelming, visit a credit counselor. The nonprofit National Foundation for Credit Counseling has a number of local members who will go through your stacks of paperwork and unopened mail and help you get on a path to fiscal responsibility. Visit www.nfcc.org to find an agency near you. They can help you negotiate with credit-card companies and reduce your interest, and the cost to you should be minimal, if anything. Be wary, however, of unscrupulous offers to get you out of debt. A number of companies will take your money and never make a payment on your behalf. Check with the Better Business Bureau or the Texas attorney general's office to be sure.
"We helped 3.2 million people last year, and a disturbing number of people walked into our offices with a grocery sack of unopened bills," Cunningham said. "You need to know where you stand."
8. Consider a consolidation loan
You may want to consider getting a consolidation loan to pay off all the credit-card debt at once. You'd want to compare interest rates, of course, to make sure you'd really be saving money. But a consolidation loan can result in lower monthly payments and faster retirement of your debt. You can even consider borrowing from your 401(k) plan -- but be careful. With a 401(k) loan, you pay yourself the interest, but if you lose your job, the entire loan will be due -- or you'll face a 10 percent penalty on the unpaid amount. (It's considered a withdrawal in those cases.) Be wary of credit cards that offer debt consolidations at low rates. If the rate jumps sharply after six months or a year, you may be worse off than when you started.
9. Set up an automatic savings account
It may seem counterintuitive, but a savings account can also help you get out of debt. If you have a rainy day fund stashed away, you won't dig out the credit cards every time you have a car repair or plumbing bill. Even $25 or $50 a paycheck could help you get ahead of those expenses. Make sure it's an automatic deduction, if possible -- you may never even miss it.
It's the last resort, but for some folks bankruptcy may be the only real option. If you can't meet your minimum payments, can't pay your rent or house note, and don't have any other options, bankruptcy can give you a fresh start. Talk to a credit counselor first to make sure you have exhausted the possibilities, and then talk to a bankruptcy attorney. "Getting on top and managing your cash flow as a family is not an option -- you have to do it," said Diesslin. "The sooner people are serious about it, the more control they'll have over their life."
Dianna Hunt, 817-390-7084