10 Steps To Financial Recovery

28 Nov 10 Steps To Financial Recovery

The Winter 2009 issue of USAA Magazine features “10 Steps To Financial Recovery” written by Kerry Hannon.   Ms. Hannon’s article features a debtor seeking relief from financial stress with each step being analyzed by financial planner, J. J. Montanaro.   The steps (with additional commentary) are as follows:

1.   Budget And Save

     Ms. Hannon’s #1 step should have been given more attention in her article–paying yourself first is the most important step to financial recovery.   Ms. Hannon’s debtor put aside 10% of her monthly pay into a savings account with approval by Mr. Montanaro.    Folks may find this difficult to do–to pay into a savings account when the budget is hemorrhaging out of control.   Ten percent may be difficult to set aside at first.   For a fast food worker making $8.75/hr, 10% is $150.00 per month, which is difficult on take-home pay of approximately $1290/month.   My suggestion would be to start at 1% if making minimum wage and work up to 20% if making more than $40,000.00/yr.  

2.  Cut Spending

Ms. Hannon’s debtor opted for trimming grocery bills by buying ramen over pizza and moving in with a friend.   Mr. Montanaro suggested that housing was the most costly expense and to downsize by getting a roommate or moving with a friend.     My suggestion would be to skip the ramen and pizza both — by making meals from scratch that are healthy (ramen is loaded with sodium).   Sharing with a roommate is risky as becoming dependent on another source of funds into the household is an insecure situation.    Paring down the entertainment expenses (cable premium channels vs. basic; checking out  movies from library vs. video rentals; bar-hopping on weekends v. having potlucks at your home (safer too to not have to drive home).

3.  Track Daily Expenses

Ms. Hannon’s next most important step.  Most folks do not realize where they spend their money.   Ms. Hannon’s debtor carried a notebook with her wherever she went.   Montanaro approved since little expenses add up quickly.

4.  Set Goals

Hannon’s debtor set a goal of five years.  Montanaro thought it was important to set up checkpoints along the way.    Both of these recommendations are components of  S.M.A.R.T. goal-setting.

  • Specific – no vagueness — Hannon’s debtor made a definite timeline and a definite amount.  
  • Measurable–Hannon’s debtor was vague here (“Debtfree”); instead, “I want to pay off $XXX of my debt in five years.”
  • Attainable–the goal must be reachable.  I.e., Ms. Hannon’s debtor should not make a goal of  “I want to pay my entire debt of $35,000 in one year.” –not if she is making less than $60,000/year.
  • Realistic–The goal has to be within the realm of possibility (see above).
  • Timely–the goal should have smaller checkpoints within the main deadline –to make sure the goal is being approached.

  5.  Take a Second Job.

     Hannon’s debtor was able to pay an additional $6,000 towards her debt.   Montanaro approves.   My approval would be based on the individual reader’s family situation–working two jobs is often a bad choice when the household then does without mother or father and the other parent raises children as a single parent.    This would be a last choice option in my opinion.

6.  Pay Off High Interest Loans Systematically.

Hannon’s debtor went with the high interest payday loans first; Montanaro approved.    Whatever system used, whether it is highest interest first, largest amount of debt first or smallest debt first — methodically seeing progress is the important part.

7.  Pay Bills Automatically Online.

Hannon’s debtor got rid of late fees with this method; Montanaro recommends paying this way as the effect will improve your credit score.   Automatic payments take the risk out that a payment will be forgotten.

8.  Find Out Your Credit Score. 

Hannon’s debtor kept track of her credit score to measure her progress (she began at 491 and ended at 648); Montanaro mentioned the importance of a good credit score.    Hannon’s step is a good one and helps to measure progress when a debtor is not seeing the balances go down quickly enough — maybe the progress is being made in this arena rather than the total amount of debt.

9.  Fix Credit Score Errors.

Checking your credit report at least once a year is vital.  Hannon’s debtor found errors on her report (errors can affect your credit score); Montanaro agreed and recommended www.annualcreditreport.com as a source for free credit reports (but not credit scores).

10.  Do Periodic Check-ups.

Hannon’s debtor used the USAA Financial  Assessment every six months (one must be a member of USAA to do this); Montanaro suggests regularly assessing the financial situation.  One website which offers a number of free financial calculators can be found here.

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I'm a consumer protection lawyer in Oregon, working with people in Klamath; Lake; Jackson; Josephine; Curry; and Deschutes County. I speak regularly on bankruptcy and consumer protection issues nationwide.

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