Chris Emmerson can't seem to get past his paycheck-to-paycheck way of life.
At 39, the divorced father of two was accumulating around $10,000 in credit card debt each year. He missed credit card payments because there was no money left after regular monthly bills were paid.
How'd you get into this mess?
"I have a habit of not living within my budget," says Chris, an Army National Guard policeman. "I pay off all bills, then I jack them up again, living paycheck to paycheck, missing some payments, and I always seem to be behind. God forbid something bad happens 'cause I wouldn't be able to afford it."
In 2007, for example, Chris used a home equity loan of more than $9,000 to pay off the plastic, and in 2008, he eliminated an additional $9,000 in debt with most of the proceeds from his late grandfather's estate and put the remaining $2,000 in a savings account.
What's different now?
But it's not enough to keep him from continually teetering on the edge financially.
"I just think I have a horrible sense on how to manage my money," he says.
A fresh start
Chris' downfall has always been unexpected big-ticket items, such as repairs to a septic tank. He's able to pay the regular bills with his monthly budget.
"My kids needed food, so I paid for food, they needed lights and heat, so I paid that," he says.
But there's no money left over for emergencies. And when they have happened, he has turned to the credit cards or let his card payments go.
So what should he do to build a cushion?
Go over expenses
Chris reviewed his expenses for six months, categorized the spending and found a few hundred dollars that should be left over at the end of the month. That money should be budgeted for savings.
For the time being, Chris needs to stop eating out and buying anything that's not a necessity. That would help ensure those few hundred dollars make it into the savings account.
Rebuild credit
Next, Chris needs to take stock of his credit. Right now, that's one nasty reality he doesn't want to face. His credit cards have been canceled.
I just want to get my kids to college
Back when he was ignoring credit card payments in favor of paying for necessities, he said he didn't care what happened to his credit scores. He already owned his home and car, so he wasn't worried.
Times have changed.
"I don't want to have a really low credit score because I'm almost 40 years old, and I should be financially stable and have nest eggs and 401(k)s and everything that normal 40-year-olds have," he says.
The last time he checked, his credit score was in the middle to low 500s, but he thinks it's gone even lower since then. (Credit scores above 750 are ideal and will get borrowers the best loan rates. Scores below 680 can make it more difficult to get loans or credit cards with the lowest rates and best terms.)
Chris must take three steps to rebuild his credit:
- Face the truth, no matter how ugly.
- Contact the three major credit bureaus -- Equifax, Experian and TransUnion -- to see exactly where he stands.
- Apply for a secured credit card. Chris would deposit money into a savings account with a credit card company, and the lender would issue Chris a credit card with a limit that matches his deposit. It's an insurance policy for the lender. If Chris doesn't make payments, the lender can reclaim what's owed from the savings account.
The sooner Chris can show he can make timely payments, the faster his credit score will improve.
Prepare for emergencies
Chris has learned the hard way that it's essential to have an emergency reserve of cash.
Financial planners generally recommend people keep between three and six months' worth of expenses in a liquid account. This money would cover bills should a family member lose a job or encounter unexpected financial needs.
Chris should start an automatic withdrawal -- $25 a week is a good start -- from his checking account into his savings account. Before long, he'll beef up his emergency fund to appropriate levels.
Until then, he needs a backup plan.
His mortgage is in good standing, so he should contact his bank and apply for a home equity line of credit. Rather than a one-time loan, a credit line will offer Chris access to funds anytime he needs them. This credit line should be used only for actual emergencies. He may not qualify right away because of his past credit troubles and because lending requirements have gotten much tougher since the start of the credit crunch, but he should talk to his bank to know where he stands.
Retirement versus college savings
For the long term, Chris has two major goals: college for his kids and his own retirement.
"Right now, getting my kids to college is really the only thing I'm worrying about," Chris says. "I'm young enough that I can always work if I have to work. If I have to work at the local convenience store to take care of me, that's fine."
However, Chris isn't yet in the financial position to save for college. Another reason to bolster his emergency fund so he can turn next to setting up a college fund.
As for retirement, Chris has a retirement savings plan available to him through the military, but he's never made any contributions. He's been banking on his pension, which should amount to about $2,000 a month if he retires at age 42 from his military policeman position. He says he then plans to start a second career, perhaps in civilian police work, which would net him another pension on his second retirement.
The pensions are a good strategy, but they're not likely to be enough. Once Chris' debts are paid, he should start small contributions to his employer's retirement savings plan.
Producer's note: Do you have a financial emergency that you'd like help with? If so, e-mail your story to Karin Price Mueller at money911help@hotmail.com.
Published March 26, 2009
