Last Updated: April 24, 2010
When it comes to getting out of debt, financial planners suggest that you need a financial planning toolkit. But what kind of tools belong in the kit? A 2009 article in the Journal of Financial Planning suggests the following:
Create a Budget and Track Your Expenses
When it comes to eliminating debt, the very first item on your to-do list should be creating a budget, followed closely by tracking your expenses. As part of his due diligence, FPA member Richard S. Gardner, CFP®, RFC®, of Lionheart Financial Planning, Inc., uses a fact finder that is very detailed in determining cash flow. "Most clients are usually very surprised at the amount of money that they can't account for," said Gardner. "I then ask them to write down every expense and purchase they make for a month by carrying a notepad with them. At the end of the month, they usually have a good idea how much money is being wasted at the local Starbucks or McDonalds and are willing and able to get their discretionary spending under control to help set funds aside for their more important goals."
FPA member Roberta Lee-Driscoll, CFP®, suggests that it's worth tracking your spending on Quicken or some other tracking software or system. "People talk about budgeting, but you can't effectively budget until you get a handle on spending, so that's the first step." According to Lee-Driscoll, one way to get a handle on spending on non-essential items is to set aside a designated amount in cash in an envelope and use only that cash to pay for those items.
Build an Emergency Fund
"I require my clients have an emergency fund equal to at least six months, though 12 months is best in this environment, of non-discretionary expenses such as mortgage, loans, utilities, groceries, and insurance premiums before I will set up any kind of investment portfolio for them," said Gardner. "This helps keep them out of credit trouble if things don't go as planned or someone loses a job and they don't have to resort to credit cards, loans, or tapping retirement accounts for funds."
Learn How to Save and Spend
Gardner suggests the best way to learn how to save is to have funds deducted directly from your paycheck or deposit account and redirected to savings vehicles. "It's the old 'out of sight, out of mind' adage," he said.
In addition, Gardner says learning to be money smart can start when children are young. "I also have good luck with the children of clients," he said. "I routinely provide basic financial education to the children of clients. This education teaches them how to open and maintain a checking and savings account, track expenses and live within their means. I find that most kids, especially teenagers, are more receptive than we adults give them credit for and usually ask for additional information on investing so they will be better informed when they join the workforce."
Consider Behavioral Training
If you can't get a handle on your spending, it might make sense to schedule an appointment with a local psychologist or psychiatrist who deals regularly with money issues. According to financial planners, you should develop an understanding of your relationship with money.
Create a Backup for Mortgage Emergencies
If you anticipate any difficulties paying your mortgage, consider assembling a list of local experts in lending, bankruptcy and estate issues. That's what financial planners do for their clients. "I have a network of mortgage experts in the real estate industry," said Gardner. "Since the meltdown in the housing industry, mortgage programs have been changing rapidly. My network allows me to reach out to mortgage specialists and obtain the best information for my clients when the need arises."
Another planner, quoted in the Journal of Financial Planning, suggests the following: If you anticipate that you might fall behind on your mortgage, consider renting out rooms in your residence to responsible people you've screened, as a way to help manage those future payments.
Understand the Tax Consequences of Tapping Various Assets
Should you never deplete your emergency fund, financial planners say it's worth understanding the tax consequence of tapping certain assets in certain types of accounts vs. others. "It's essential to work with a planner to minimize both tax and investment loss," FPA member, Elisabeth C. Plax, Ph.D., CFP®, said in the Journal of Financial Planning.
Look for Simple Money-Making Opportunities
When your debt is high, and income is not sufficient to cover your expenses, planners suggest you consider the benefits of taking on odd jobs, selling unwanted or unneeded home items, or perhaps taking on a second job to help bring your finances under control. "I tell people to take on jobs in their immediate communities that don't involve a big investment in transportation, clothes, or other work-related expenses so they are able to keep more of what they make," FPA member Louis J. Schwarz, CFP®, said in the Journal of Financial Planning. "But if they're concerned about their friends seeing them, perhaps they should find a way to work a job outside the neighborhood."
Be Ready to Reset Your Retirement Expectations
It's quite possible that you're concerned about your money lasting over your lifetime. If you're retired, Gardner suggests you consider taking a part-time job to combat that concern. "The monies earned allow you to reduce, or even stop, the withdrawals from their retirement accounts," he said.
For those not yet retired, Schwarz suggested in the Journal of Financial Planning that "you sit down and plan for a better-paying job or career once the economy recovers, and take time to look realistically at your current retirement plans and set a new plan, even if it means retiring significantly later."