In the last blog, we discussed the importance of decluttering your financial house, as clutter and chaos tend to go hand in hand. Hopefully you have had the chance to tackle the mounds of paper that represent your financial house and separate the ‘must keep’ documents from the ‘shred now’ stuff. And even further, file those ‘must keeps’ according to each financial room they represent; personal debt, savings plans, retirement plans, estate plans and insurance needs.

Once you have accomplished this hefty task, you can then educate yourself on the basics of each of your financial rooms. Let’s begin with your personal debt room; do you know how much debt you have? What your debt is costing you (interest rate you are being charged)? And how long will it take you to pay off each loan that you have?

If you don’t know the answers to the above questions you could be in danger of accumulating debts that you will find hard to repay. Unfortunately anyone can experience financial difficulties and fall into the debt trap. The only way to avoid this common problem is to take the following precautions.

• Develop a good understanding of exactly what you owe and to whom. Create a debt journal with the following headings; amount owed, to whom, interest rate being charged, scheduled repayment amount and date loan will be repaid. Have the highest rate loan as your first entry, then the second highest as the second entry, and so on.
• Create a debt reduction plan. It is best to do this with the help or guidance of your banker/financial planner. Not only can they provide advice as to what loans you should pay down first, they can also help create and implement a debt repayment strategy.
• If you decide to go it alone, then ensure you pay down your highest interest rate loans first. If you can, try paying more than the scheduled repayment amount. You might also talk with your banker to see if you can renegotiate the interest rate on your high rate loans.
• If you have many loans, consider consolidating them into one manageable loan.
  Credit cards are probably the worst debt traps. They are often easy to acquire and easy to use…. and abuse. If you are not paying down the full amount owing on your cards the interest starts accruing and before you know it, you are knee deep in debt. If this sounds familiar then it may be time to take some serious action. Go see your banker and ask to convert all your credit card debt into one manageable loan. Then cut up those cards and start paying cash for your purchases.

 Access to credit does not have to be your enemy. Credit can be a good thing if you can use it responsibly. I often advise my clients to open up a line of credit that would cover 3 months of their living expenses should they ever happen to lose their jobs and/or become unable to work. I have seen emergency circumstances come about and without easy access to money, the situation can quickly become worse. You just need to be responsible and not use it until you really really need to.

If you decide to create your own debt reduction plan, check out some debt reduction calculators at: www.itsHERmoney.com/herfinancial-calculators. Remember it is not the amount of money you make that will lead you to financial independence but how you spend and save it!

 
Rhonda Sherwood, CFP, FMA
Wealth Advisor
www.rhondasherwood.com
www.itsHERmoney.com

The No. 1 New Year’s resolution people will make for 2008, revealed in a recent survey by Franklin Covey, is to get out of debt. (Losing weight is No. 2 and exercising is No. 3.) As most of us already know through our own experience, when it comes to resolutions more often than not we tend to fail. So how can we make this year different and ensure we stay on the right path to reducing our personal debt?

Here are a few simple steps to help you through the process:

1. Get a good understanding of exactly what you owe. Too often we allow our fear to keep us in the dark when the only way out of the situation is through knowledge. Sit down with a pad of paper, a pen and all those loan documents. Write down what dollars you currently owe on each loan, their interest rate and monthly payment. Number each loan with number one being the highest interest rate loan, number two being the second highest interest rate loan and so on. When you have completed the task you should have a clear picture of what loans you should be paying off first. For example, if you have a car loan at 11% and a line of credit at 4% you want to pay that car loan off first. You might also want to speak with your banker about reducing the interest rate on higher rate loans. See if you can increase that 4% line of credit enough to pay off that 11% car loan. It never hurts to ask.
    
2.  So now that you have a better picture of your current debt let’s move on to your fixed monthly cash ‘outflow’ (after your loan payments have been made where are you spending the rest of your money?). Blind or spontaneous spending is how most people get into credit card trouble. So to avoid this trap know where your money is being spent. First record your ‘fixed’ monthly costs or overhead costs excluding your loan payments. This could be your food, hydro, cable, or phone. It is any costs you must pay monthly to keep afloat. Don’t forget those annual costs such as car insurance. Take the total dollar amount of all your annual costs and divide by 12. Add this amount to your fixed monthly costs. For example, annual car insurance $1200/12= $100 monthly cost. Finally add your total monthly fixed costs to your total monthly loan payments. You now have your fixed monthly cash outflow.
    
3. Now let’s compare this dollar amount to your monthly cash inflow (all the after- tax money you are bringing in every month). If your cash inflow is greater than your cash outflow then debt reduction and savings is achievable. If you have being doing neither so far and have instead been spending your excess cash it is time to make some changes. This is something you can control now. What I recommend my clients do is to record everything they spend on daily basis for at least a month or two (exclude fixed costs). This will help give you a better idea of how you’re spending that excess cash and where changes can be made.
    
4.  Once you know the amount of the excess cash that you had previously been discretionarily spending you can now direct it towards your highest interest paying loans. Continue to pay off each loan with the excess cash until you’re either debt free or until the return you could achieve on a conservative investment portfolio is higher than the interest rate you are paying on your outstanding debt. Step four can get a bit complex and so you may want to seek the help of a financial professional.
    
5.  If your cash inflow is less than your cash outflow (spending more than you make) it is time to make some serious life changes or you will be heading straight for bankruptcy. One option, make more money. Sometimes financial pangs are just the push we need to either ask for that long overdue raise or move on to a better paying job. You might even have to take on a second job temporarily until you are out of the financial crunch. Another option to consider, go speak with your banker to see if you can restructure your current debt. Combine all those loans into just one with a more manageable payment. And finally, it may be time to consider downsizing your current lifestyle. If you cannot afford that home, that car, then it is time to make some changes. It is much easier to sleep at night with money in the bank and manageable debt then it is to be in a big beautiful home that you just cannot afford.
    

Start 2008 on the right track and take charge of your finances. And just as you would hire a personal trainer to get into physical shape consider speaking with a money coach to help you get into financial shape. Financial Planners have the expertise to create personal roadmaps to help you get to where you want to be financially. You don’t need to take the journey alone. They are here to help. And always remember that it is never too late to make a fresh start!

 
Rhonda Sherwood, CFP, FMA
Wealth Advisor
www.rhondasherwood.com
www.itsHERmoney.com