Start with a plan

The Washington Post Sunday - - BUSINESS - MICHELLESINGLETARY

In a fix? The surest way to sort out your fi­nan­cial trou­bles is to to­tal the debts, then tackle them one by one.

My grand­mother, Big Mama, was a stick­ler for or­der. From BigMama I learned to look at a fi­nan­cial sit­u­a­tion and come up with a plan. I try to pass on that wis­dom to read­ers, par­tic­u­larly those who join me reg­u­larly formy live chats on wash­ing­ton­ The fol­low­ing are ques­tions from some of those read­ers look­ing for a plan:

Q: My hus­band and I are rent­ing a condo but re­ally want to pur­chase a house. We have about $11,000 in a con­sol­i­da­tion loan (did a con­sol­i­da­tion to stop us­ing credit cards and it’s been great. The in­ter­est rate is lower than the credit cards’). We cur­rently have $12,000 in sav­ings. Would it make more sense to keep pay­ing the loan (the min­i­mum is $350 a month, but I usu­ally pay $700 to $1,000) and save whatwe can, or take the money from sav­ings and pay off the loan and then build that backup (this­would elim­i­nate all debt)? A: This is what I would do:

Cal­cu­late how much you need for an emer­gency fund of at least three months of liv­ing ex­penses (rent/mort­gage, food, util­i­ties, cable, cell­phone, etc.). This will give you a bench­mark of how much you need in this fund be­fore you even think of buy­ing a house.

Des­ig­nate about $1,000 to $2,000 for a “ life hap­pens fund” for ex­penses that come up such as car re­pairs, etc. You can im­me­di­ately cre­ate it by tak­ing the money out of the $12,000 you’ve saved and putting it into a sep­a­rate ac­count.

That leaves you with $10,000 of the money you’ve saved al­ready. From that do the fol­low­ing:

Set aside $5,000 as the be­gin­ning for your emer­gency fund.

Con­sid­er­ing the cur­rent job mar­ket, best to have some cash saved up. But you can stop sav­ing for this ac­count when you reach the goal of at least three months of liv­ing ex­penses.

Take the re­main­ing $5,000 and pay down the $11,000 on the con­sol­i­da­tion loan. That will leave you ow­ing $6,000. If you are pay­ing up­ward of $1,000 a month on that loan, you could be done with it in six months.

Once you’ve set up the life hap­pens fund, met your goal for the emer­gency fund and paid off the loan, you’re ready to start sav­ing for the house.

Q: I have two credit cards, one with a bal­ance of $1,700 and the other with a bal­ance of $2,400. I have a per­sonal loan of $2,800, a car pay­ment of $312 a month with a $14,000 bal­ance, and a stu­dent loan of $15,000, which is nowin de­fer­ment. I want to start the process of pay­ing these bills off to buy a house in a year.

Where do I start first? I make at about $1,200 bi­weekly af­ter taxes. I have $3,600 in sav­ings.

A: Let’s first to­tal all the debt to get the big pic­ture Credit cardNo. 1, $1,700 Credit cardNo. 2, $2,400 Per­sonal loan, $2,800 Car loan, $14,000 Stu­dent loan, $15,000 That’s to­tal debt of $35,900 and to­tal sav­ings of $3,600.

Please don’t see what I’m about to tell you as dash­ing your dreams of be­ing a home­owner, but you should start by putting off the idea that you will be in the po­si­tion to buy a home in one year. You have too much debt to deal with first. If I were you, I would:

Work on in­creas­ingmy emer­gency fund. You have $3,600 in sav­ings. How­long would that last if you lost your job? You should aim to have at least three months’ worth of liv­ing ex­penses. So your home­work is to cal­cu­late how much it costs to run your house­hold for a month (rent, car pay­ment, food, util­i­ties, etc.).

Work on build­ing up a life hap­pens fund.

Start ag­gres­sively pay­ing off your debts in the or­der that I listed above, be­gin­ning with the debt with the low­est bal­ance. Make the min­i­mum pay­ments on the other debts. When you pay off the debt first on the list, take that money and ap­ply it to the next debt on the list, and so on.

Get your stu­dent loan out of de­fer­ment and make min­i­mum pay­ments as part of the debt re­duc­tion I just laid out. Go to www.ib­ to see if you are el­i­gi­ble for a plan to make the pay­ments man­age­able.

Fol­low these steps and you’ll be putting your­self in the po­si­tion to have a nice cash cush­ion, no debt and can start the process of buy­ing a home. Read­ers can write to Michelle Sin­gle­tary c/o TheWash­ing­ton Post, 1150 15th St., NW, Washington, D.C. 20071. Her e-mail ad­dress is sin­gle­tarym@wash­ Com­ments and ques­tions are wel­come, but due to the vol­ume of mail, per­sonal re­sponses may not be pos­si­ble. Please also note com­ments or ques­tions may be used in a fu­ture col­umn, with the writer’s name, un­less a spe­cific request to do oth­er­wise is in­di­cated.

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