By Karin Price Mueller, MSN MoneyMary Pollack has fallen into a hole and she's not sure how to start digging out -- or even where to find a shovel. After two divorces, one bankruptcy and a round of credit counseling, she hasn't been able to bring her balance sheet into positive territory.
How money is a burden
Mary earns an after-tax weekly salary of $675 and gets weekly child support of $142; her income averages $3,462 a month.
Her monthly expenses: $1,485 for rent, $175 for utilities, $275 for a car payment, $361 for car insurance, gasoline and maintenance, $415 for her son's college tuition, $124 for cable television and Internet service, $350 for grocery bills and $100 for dining out. That's a total of $3,285 -- and it doesn't include incidental costs for clothing, hair care, gifts or entertainment. Calculator: Build a sandwich
She's also overdue on several bills, including $282 for medical costs, $233 for a student loan and $80 for 2-year-old phone charges. Story of a 2-year-old bill
In a nutshell, Mary spends close to or more than she earns each month, and she runs out of money before she can make payments on her existing bills. That means there's nothing left over to pay down her growing debts.
Mary is the first to admit a lot of her financial problems are in her head. She's always had trouble with money, so her financial woes have become part of her identity -- so much so that she carries her folder of bills with her wherever she goes, like a security blanket.
She says she wants to have the means to take vacations and buy presents for her grandchildren, even have a little in the bank for emergencies. But her self-sabotage has stopped her from attacking the real problem: her attitude about money. What can Mary live without?
Mary, like most people, dreads the "B" word: budget. But budget is not a dirty word. It's the secret to financial freedom.
No matter how troubled your finances, you have the power to control your money. You decide which checks you write, which bills you pay and exactly where you spend your money. No one can get out of a money mess without first having a true understanding of where the money is going.
Think of it this way: If you want to lose weight, a crash diet might give you some immediate satisfaction, but it's impossible to maintain over the long term. Before long, you'll be cheating with those fat-laden lattes or hot-fudge sundaes. Better to make a lifestyle change you can live with.
Budgets work the same way. If you set a bare-bones budget, you're never going to stick with it. Instead, Mary needs a lifestyle change in the budget category -- something she can handle for the long term.
Our advice: Start with baby steps.
A better budget
First, Mary has to take two months for some serious accounting work. She needs to get a better handle on where she spends her money. She's tried this before, but she falls off the wagon, opting for drastic measures -- the crash diet -- rather than realistic small changes. This time, she's going to cut back gradually while she keeps track of her spending. What happens when Mary writes a budget?
As Mary watches where her money is going, she's going to see some obvious places to cut. She may be willing to forgo the $4 cappuccino or the clothes she finds (even the hard-to-resist items on sale) if she constantly reminds herself why she's making these money changes.
Instead of her folder with bills, she should carry with her a brochure about the vacation she wants, or pictures of the toys her grandchildren say they want for the holidays. These can be her new security blanket. As she pays off her overdue bills, she should add the zeroed-out balance statements to her folder as a reminder of her successes. And each time she's tempted to spend on something that's not a necessity, she should look at her security blanket and ask herself which is more important: the short-term fix or the long-term goal.
If she gives herself a chance to think and is honest with herself about the relative importance of things, she'll make the right choice most of the time.
That doesn't mean Mary has to do without completely. She should set a manageable monthly "fun" allowance. This could be money for the movies or for a dinner out. If Mary never has the chance to enjoy her money, she won't be very motivated to get it all under control.
If she finds something she really wants to buy but doesn't have enough allowance, it's time to play the waiting game. Instead of acting on impulse, Mary should wait a month before making the purchase. She may come to realize she doesn't need the item. If she still wants it, the waiting period will give her time to save up her fun money to make that special purchase.
Downsize the car
Mary's car lease is coming to an end, and that's good news. This is one area where she can make progress quickly.
When she gets rid of the lease, taking on a new one would be a huge mistake. She admits she doesn't need a large or elaborate car, and Mary lives very close to work. With some smart shopping, she should find a used car that costs between $1,000 and $2,000. Then, she should join a credit union and take out a small loan -- one that she vows to keep current.
My credit union offers a 36-month loan for used cars at 6%. Mary may get a higher rate because of her less-than-perfect credit, so let's use a 10% interest rate for this example. A $1,000 loan would mean monthly payments of $32.67. A $2,000 loan would cost $64.53 a month. That's a huge savings over the $275 payment she has now, and her auto insurance probably will be cheaper, too, because the car will be less valuable.
Mary needs to make sure she doesn't allow herself to be lured by that new-car smell or by envy over cars driven by her friends. She's going to free up more than $200 a month by downsizing the car payment, and those funds can be put to work paying off her overdue bills.
Make lunch
One of the easiest places to cut back in a budget is on unnecessary food purchases.
Of course Mary has to eat lunch, but she doesn't need to pay $30 a week for it. If she simply brown-bagged it, she'd save at least $15 a week, depending on her grocery-shopping habits. That adds up to $780 a year -- no small change. Sack lunch vs. takeout
Mary says she's tried bringing lunches from home before, but she's had trouble waking up early enough to pack the food. There are several strategies she can use to find the time:
- Prepare in bulk: Mary could set aside an hour on Sunday night to make a week's worth of lunches.
- Make dinner, make lunch: When she prepares her nightly meal, Mary could take a few extra minutes and fix the next day's lunch.
- Eat at home: Because Mary lives close to work, she could go home for lunch.
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And no one says home lunches have to be boring. You can cook a baked ziti and divide up the portions for lunches. Or make grilled chicken and rice, then divide it into single-meal containers. You can freeze tasty leftovers in small containers and defrost them the night before.
Small sacrifices like this will give Mary the extra cash to pay down debts. Once her debts are taken care of, she
can apply the extra funds to a vacation savings account or an account for the grandkids.
Work it
Mary says that, come fall, she'll have an opportunity to work overtime. Perfect. Rather than use those extra dollars on luxury or discretionary items, she should immediately start putting the money toward the overdue bills (and make sure she doesn't get behind on the current ones).
In six months, Mary should be able to eliminate her outstanding debt, and her ongoing budget should be a lot easier to swallow.
Published April 8, 2008
Producer's note: Do you have a financial emergency that you’d like help with? If so, e-mail your story to MSN Money’s Karin Mueller at money911help@hotmail.com.
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