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In Debt "Up to Your Eyeballs"

Lending Tree commercial though funny, may be painful to watch.

Does anyone remember that funny Lending Tree commercial where a guy named Stanley Johnson appeared to be living the good life?  Stanley had the big house, a country club membership, a pool and even a brand new car.  When asked how he does it, Stanley responds with a contrived smile, “I’m in debt up to my eyeballs; I can barely pay my finance charges.  Somebody help me!”

In January, banks sent out billing statements that included all the charges for those holiday gifts many consumers put on their credit cards.  If you were one of the many who used your card to pay for holiday shopping or for that big ticket item that was on sale at year-end, you may be feeling a bit like Stanley Johnson right now.  Here are  five tips for getting over your post-holiday credit card hangover.

1.  Assess the damage

Go ahead and gather all your credit card statements and list your debts in descending order from smallest to largest.  Put this list somewhere visible so it remains on your radar. 

2. Go on a financial diet 

If you’re unable to pay off your balances in full, stop all discretionary spending for the next month.  Put your credit cards away.  Just as a dieter will remove cookies from the cupboards when starting a diet, you should remove your credit cards from your wallet.  Studies have shown that paying cash actually discourages spending while using credit encourages it.

During the first week, track your spending; know where every dollar goes.  Successful dieters learn to track their calories so they know what foods are healthy and what foods are not.  While this can be tedious, it helps break bad habits and it also reinforces good ones.  Tally your expenses for the week and categorize them under headings like housing, groceries, dining, and transportation.  You will probably be amazed at how the “financial calories” add up.  Determine where you can cut back and earmark your cost cutting toward the credit card bills. 

3. Consolidate

If you have more than one credit card and can consolidate them onto one low interest card, do so.  Be extremely careful about using a home equity loan to payoff your unsecured credit card debt.  This option sometimes seems attractive since you can write-off the interest you pay.  But beware!  If you miss a credit card payment you lose your good credit rating, but if you miss a mortgage payment you could lose the roof over your head! 

4. Pay off your smaller debts first

Experience the gratification of eliminating your bills one by one.  When you start paying off your smaller debts first, you will receive quicker feedback and enjoy the success of eliminating a debt entirely!  Once a loan is paid off, apply that former payment to the next smallest debt.  You may be tempted to pay off your larger bills first, especially if they charge higher interest rates, but you will be more likely to stick to the plan when you receive ongoing positive feedback and see fewer bills arriving each month. 

5. File your taxes and apply your tax refund.

The Internal Revenue Service recently reported that it refunded taxpayers $328 billion last year.  On average, Americans received refunds of more than$3,000.  If you expect a refund, gather your tax forms, receipts and shoebox of papers and get them off to your accountant right away.  The sooner you file, the sooner your refund will be paid to you.  Now is not the time to procrastinate.  Use your refund toward your credit card balances and then determine whether you should change your withholding to increase your take-home pay.

Once you’re back on track, focus on living within your means.  Build an emergency fund for unexpected events, and begin to set money aside for retirement.  Doing so will help you replace a “Stanley Johnson smile” with an honest smile of relief, financial success and peace of mind.

 _________________________________________________________

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

Securities offered through LPL Financial Member FINRA/SIPC

Steve Davis is a  CERTIFIED FINANCIAL PLANNER ™  visit his site www.talkwithdavis.com for more information.

Karen McSherry February 14, 2011 at 05:22 PM
Good Advice, Steve. Too bad there are so many "Stanleys" out there
Steve Davis February 16, 2011 at 07:36 PM
I think you're right, Karen. My experience tells me that there are a lot of folks who are struggling with this issue. The key is to acknowledge the problem and start to fix it. It doesn't happen overnight, but with time and diligence folks can climb out of debt and start to plan for the future. Not only are the financial benefits to doing so great, the emotional benefits are tremendous too.
Jen Vondenbrink February 16, 2011 at 09:22 PM
Great tips Steve! Especially tip number 4 - Pay off your smaller debts first. There's something to be said about getting something paid off that helps fuel the desire to do more. In our house, we've gone to using cash as much as possible and trying to stay within our income limits. It has definitely changed how we look at things, but has made a huge difference.
greg February 22, 2011 at 01:26 PM
Good marketing Steve. Greg
tom lopolito February 23, 2011 at 05:47 PM
Looks great Steve. -tom l
Joseph E. Mackie,M.D. March 02, 2011 at 10:55 PM
Important to have one's offspring of young adult age read this. jmackmd

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