Team up on plan to get finances on track peer review

Last update: April 19, 2007 - 7:10 PM

Q My wife and I have about $18,000 in credit card bills, a $26,000 consolidation loan and about $10,000 in student loans. The consolidation loan was taken out about two years ago for $35,000 to pay off credit card debt, a car loan and other bills.

Since then we went through a major medical expense, which we paid off by putting it on credit cards. We also separated, which caused our expenses to go through the roof.

Now we are together again, working things out and renting a townhouse. I would really like to buy a townhouse next fall when our lease is up to start building up some equity.

I know nothing about bankruptcy, and would prefer to dig myself out of this hole without considering it. Are there any other options?

AARON

A First, it's great that you and your wife have reconciled and want to start heading in the right direction. It will take time, communication and a strong commitment from both of you to change your financial habits for the long term.

Bankruptcy should be considered only as a last resort for debt relief. It can have serious long-term effects on your credit rating, future interest rates and ability to buy a home or car.

The townhouse market is quite soft, so don't feel like you have to buy just yet. It is far better for you to work off your debt and maybe begin to put funds away for retirement.

I recommend the following:

• Build an emergency fund that covers three to six months of living expenses. This will help cover any unexpected expenses (like the medical bills) and provide a cushion in case you have an income loss and need to supplement that with savings.

• Start chipping away at your debt. Continue your monthly payments for your consolidation loan. At the same time, start paying above the minimum required on your credit cards. When your consolidation loan is fully paid, apply that payment to your credit card balances. They will disappear faster than you think if you are consistent and diligent.

Carry your student loans until you have paid off the consolidation loan and credit cards. Student loan debt is usually at a lower interest rate and the interest may be tax-deductible.

• Start saving in your employer-sponsored retirement plan such as a 401(k) or 403(b) to maximize any employer match. The match is free money you shouldn't pass up. If an employer-sponsored plan is not available to you, consider a Roth or traditional IRA.

• Go to www.annualcredit report.com to get free copies of your credit report and credit score. You will have time to clear up any issues before you apply for a mortgage.

• Start tracking your expenses to see where the money goes each month. This will help you identify areas that you might be able to cut back on so you can get started on the above suggestions. You can also evaluate your ability to afford the townhouse that you'd like to buy.

SARAH ASEBEDO (24)

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