Money will be a real issue for you the rest of your life. This is a good article to see what can happen, and it has some good tips.
The Fantastic Life Rule #9: Set Goals
No matter what your goals are, chances are money plays some part in achieving them. If getting out of debt is your goal, this rule reminds you that even the smallest steps toward your cause will get you there eventually.
Get out of debt — on $26,000 a year
Nagging debts, begun with a credit-fueled spending spree in college, are keeping a hairdresser from her dreams. But there is a path out of the red.
Tracy Hunihan can’t get away from her past.
Today, the 37-year-old single hairdresser pays her new bills on time, without fail, and has no credit cards. But she’s made big money mistakes in the past, leaving her with about $3,000 in ancient bills, some dating back nearly 20 years.
Credit cards: ‘Like money from heaven’
“I’m doing really well now on my current bills and my day-to-day living expenses,” says Hunihan. “I make it a priority to make sure that’s paid first — my rent, my groceries, my electric bill — but as far as getting anything that has happened in the past, I can’t catch up with that.”
Hunihan wants to pay off what she owes: credit card bills from her college days, some old utility bills worth $231 and a $79 outstanding bill from an old kickboxing gym membership.
She also wants to get rid of the $1,000 she owes a bank for overdrawn checks. (Her ex-boyfriend, who is now in jail, ran up that tab, she says, but Hunihan is stuck with it.)
Despite her desire, Hunihan doesn’t see how she can whittle down her debts. After paying her essential bills each month, she has little left from her $26,000-a-year income beyond some spare change for dog and cat food.
‘I always thought that the bills could wait’
Attacking those old debts
Hunihan has a tight budget but could start knocking out those lingering bills:
- First, she could find a way to bring in extra income and put every penny of it toward old debts. Perhaps she could get an extra shift at the hair salon or a part-time retail job.
- Next, she should pay off the smallest debt first. Though a $79 gym bill may not seem like much, erasing it from her “to pay” list would feel like a great accomplishment. She could then move on to the next bill, and the next, until they’re gone. Her old credit card bills have balances of less than $600 each and interest rates of more than 25%, so there’s no advantage to paying one over the other.
- Hunihan also needs to check her credit report to make sure there are no old bills she’s overlooking. She can get a free credit report once a year from AnnualCreditReport.com, a service provided by the three major credit bureaus.
Understanding how she dug the hole
Hunihan no longer has any credit cards — the lenders canceled them due to nonpayment — but her debts remain.
To avoid falling back into dangerous spending patterns, Hunihan needs to understand the roots of her habits.
“My first memory of my mother and money is seeing my father yell at my mother because she was always spending money,” Hunihan says.
Her dad was a strict budgeter who used a green pad and pen to keep track of every dime, but Hunihan took after her mom, whom she calls a shopaholic.
Hunihan began her relationship with credit cards as a freshman in college when she was greeted by a long table filled with banking representatives. In minutes, she walked away with five credit cards and thousands of dollars of available credit.
Within two or three months, Hunihan had maxed out her plastic. She didn’t bother — nor could she afford — to pay the balances, and she wasn’t worried about it. Back then, she didn’t understand why it was important to make timely payments.
“I don’t think it was until about five years ago that I understood I had to pay even the rent on time, that people couldn’t just wait for their money,” Hunihan says. “I have to pay things on time to look in the mirror and respect myself or have other people respect me.”
Hunihan’s former spending habits have damaged her credit history, but she can repair it in several ways:
- Pay her current bills on time.
- Knock out a large loan, such as the one for a new car she took out in 2007. Her poor credit netted her a 36-month loan that requires weekly payments. The $10,000 loan will cost her an additional $4,000 in interest by the time she’s through, but successfully paying it off will indicate to future lenders that she’s a better credit risk now.
- Get a secured credit card. Hunihan could open a secured card with a small amount, say $200. The lender would give her a credit card with a matching $200 limit. The lender would have Hunihan’s bank deposit for collateral, and, as long as she made timely payments, Hunihan could prove she’s become more responsible.
- Set up a regular repayment schedule with the bank where the checks were overdrawn. The account is closed, but sending money consistently will exhibit her financial discipline.
Avoiding future disasters
Hunihan shouldn’t devote all her earnings to paying current bills and ridding herself of her debts, though. She still needs to prepare for surprises.
She should set aside a small amount each week — even $10 a month — to a savings account she can access in emergencies.
And Hunihan should get health insurance. She’s living without it because her employer doesn’t provide it. But the risk is too large. If she developed an unexpected illness or had an accident, her financial plan would be ruined, and she’d be buried under medical bills.
Hunihan should check whether she’s eligible for any discounted health policies through alumni or industry groups, such as the National Cosmetology Association, which offers discounted insurance policies to its members. Or, if she looks for part-time work to bring in extra cash, she could seek an employer that offers insurance to part-timers. These are hard to find, but some larger chain companies do offer health benefits.
She should also check Families USA’s state-by-state guide to see whether she qualifies for any state health insurance programs.
Having the right attitude
Despite all her troubles, Hunihan has the right attitude. She considers herself lucky. She says she easily could have been one of those people with $23,000 in credit card debt rather than the total debt of $3,000 she has.
She also has a goal that motivates her to stick to frugality: She wants a zero balance and a shot at someday opening her own hair salon or doing hair and makeup for videos or film.
“I don’t usually fail,” she says. “I’m trying to fight for the good and make my dreams come true, and thereafter I hope to do good for other people. You’ll see me someday, I promise.”
April 9, 2009