2010-05-06 / Editorial Page

News for Families & Consumers

Bailing out your household budget
Martha Partridge
Family & Consumer Science Agent Lincoln & Wilkes Counties

Is your household budget in need of a bail-out? Not too long ago people considered spending less than they earned to be an optional activity. Credit made up the difference, sparked in many cases by confidence that income, home values, and the return on investments would just keep going up. Lay-offs, foreclosures, and an extremely volatile stock market are helping some to find out that what goes up must come down.

There are things you can do that can make a big difference in your monthly bottom line. There is no better time than the present to develop and implement your own bailout plan. Here are some suggestions to help you develop your plan.

Evaluate your mortgage and home equity debt. If you have an excellent credit score and sufficient equity in your home, interest rates are so low that it is a good time to consider combining and refinancing any outstanding balance on your home mortgage and home equity loans. In general, you should consider refinancing if the interest rate on your current loans is at least two points higher than market rates.

Unlike mortgages, the interest rates on non-mortgage loans and credit cards remains high and in many cases, is going up. Using the equity in your home to pay-off non-mortgage debt is an option, but it is also one of the causes for the current mortgage crisis. Until housing prices stabilize, it is probably wise to keep your home equity level to at least twenty percent of the current value of your home.

Pay off credit cards. The credit crunch is leading credit card providers to reduce credit limits for many credit card holders. Having your credit limit reduced impacts your available credit, which in turn, lowers your credit score. When your credit score drops, many lenders will raise the interest rate on your credit card, making it that much harder to get out of debt. To get out of debt you need to stop using credit. Make the minimum monthly required payment on all of your credit cards but the one with the highest interest rate. Pay as much as you can (above the minimum required) on that credit card until it is paid off. Committing to paying the same amount each month until all your credit cards are paid off will speed up the time to get out of debt and significantly reduce your finance charges.

Scrutinize household bills. Take a hard look at your statements for telephone service (cellular and land lines), cable television, Internet access, natural gas, electricity, water, trash collection, newspapers, and bank accounts. Eliminate services you do not use, no longer need, or can live without. Where you have a choice of providers, shop around for a better deal. Track your spending. Want to increase your pay by twenty percent? Find out where your money goes. Most families can save as much as twenty percent just by paying more attention to how they spend the money they have. Small, frequent purchases can really add up. When you identify an area of overspending, you have several options for dealing with it. You can give it up, find a cheaper alternative, and economize to reduce the cost, barter or trade, or use a free or low-cost community resource instead.

Establish an emergency savings fund. Up to now, many people have relied upon available credit to finance unexpected expenses. Financial experts recommend that you keep 3 to 6 months of living expenses in an account where you can get it if you need it. With six months of expenses in the bank, a lay-off or medical emergency is much less stressful. The additional savings also enables you to raise your insurance deductibles which will save you money on premiums.

A comprehensive review of your household budget will help you to develop your own bailout plan. Be sure to involve everyone in the household in your discussions on how to save money. You may be surprised at the great ideas your kids come up with, especially if they share in the rewards of any savings through a family outing or fun activity. They are also more likely to follow through on any bailout plan you come up with if there is something in it for them.

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