By Sandy M. FernaPick up tips from the personal finance expert as he helps three families pay down more than $107,000.ndez
If you've ever been in debt, you know how stressful it is: fielding calls from creditors, paying more interest than principal and feeling as if you're running on a treadmill that is accelerating faster than you can keep pace. According to the credit report company Experian, the clients they track owe an average of about $25,000, made up of credit card, auto loan and other non-mortgage red ink. The people that follow found themselves facing some of the most common causes of debt. Straight-talking debt guru Dave Ramsey, nationally syndicated radio host and author of The Total Money Makeover: A Proven Plan for Financial Fitness, mapped out an action plan for them. What they've learned will help you get back in the black.
Hit With a Medical Crisis
Kellye, 29, and David Smith, 33 Corryton, TN
Credit card debt: $5,600
Medical debt: $4,113
Other debt: $807
Total debt $10,520
In July 2010, Kellye, a medical tech, and David, a Sam's Club supervisor, received horrific news about their youngest son, 4-year-old Logan. "They found an inoperable stage III tumor touching almost all his organs," says Kellye.
Even with health insurance and a supplemental state program for children, their copays and deductibles were over $15,000. What's more, for six months, their lives revolved around Logan's chemo schedule, blood tests and hospital visits-so they lost wages due to missed work and leaned on credit cards.
Today, Logan's prognosis is good, but the Smiths are in a hole. They've cut back on eating out, and, Kellye says, "we've both been looking for additional part-time work." They've also dialed down on retirement contributions: David, who was getting a 4% match from work, is now only putting 2% into his 401(k). They're determined to pay off the remaining $10,000 by 2014.
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Dave's Action Plan
1 | Bring in more cash-in any way possible. "Walk dogs, blow leaves, shovel snow. Buy clothes at garage sales and sell them for more on eBay," says Dave.
2 | Build a $1,000 starter emergency fund, even before paying off the debt. Right now, the Smiths have only $300 saved. "If anything happens, they're back to leaning on the credit cards," says Dave.
3 | Cut luxuries. "If you have debt, I don't want you to see the inside of a restaurant unless you're working there."
4 | Stop investing-for now. Pause 401(k) contributions until the debts are paid.
5 | "Snowball" debt. Pay off the smallest bills first, such as lab fees or a smaller credit card balance.
A Devastating Break Up
Gloria Franco, 36, Los Angeles
Student loans: $25,000
Repayment to retirement fund: $4,113
Personal loan: $10,400
Total debt $42,713
In her early 30s, Gloria was a teacher earning $66,600, a co-owner of a townhouse with her boyfriend of four, and she drove a Mercedes SUV. After their son, Joaquin, was born in 2007, they borrowed $11,000 from her retirement plan to put a down payment on a house for the three of them to live in.
A few months later, her boyfriend, the bigger earner, moved out. Gloria struggled to keep up with the property payments. Plus, she made some mistakes. "I wanted to make that empty house into a home, so I charged all new furniture," she admits. She also let slide payments on the loan from her retirement fund, which triggered taxes and IRS penalties. Then there was the $10,000 in lawyers' fees to secure shared custody of Joaquin. In 2009, nearly $200,000 in debt, Gloria and Joaquin moved in with her parents. She gave up her Mercedes and, ultimately, declared bankruptcy, forfeiting ownership of her homes.
So far, Gloria's paid off her lawyers and built up a $4,000 emergency fund. Her goals are to rebuild her credit, refinance so the house is in her name and begin saving for retirement again.
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Dave's Action Plan
1 | Pay the tax debt ASAP. "Always attack IRS debt first, because it has the power to collect and charge very high interest and penalties," Dave says.
2 | Forget about rebuilding credit. "She needs to buy only what she can afford right now."
3 | Drive a clunker and rent a home. It is better to be self-sufficient and live modestly, says Dave. She should buy a used car-with cash.
4 | Think long-term. "When Gloria has a $20,000 emergency fund and no debt, then she might start saving for a house," Dave says.
Years of Overspending
Tom, 54, and Kathyrn Payne, 53, Franklin, TN
Income: Tom $36,000-$48,000 (based on commission); Kathyrn $62,000
Medical debt: $2,000
Credit card debt: $11,000
Car loans: $22,000
Family loan: $400
Total debt $47,400
"As a human resources recruiter, I made a pretty good living over the years, and I had lots of credit cards," says Kathyrn. "I thought owing money was just a part of life." For his part, Tom, a wireless communications consultant, owes back taxes to the IRS, $3,000 on two credit cards and some medical bills.
The couple's wakeup call came last July, when they began looking for a house to buy. Inquiring about one, "We realized that the $11,000 we'd need for a down payment might as well have been $11 million," says Kathyrn.
So the Paynes started economizing. They moved to a two-bedroom apartment, which netted them a $500-a-month savings. They cut up their credit cards and sold some antiques and musical equipment to raise $4,000 toward their expenses. They've zeroed out the $300 balance on one credit card as well as the $2,200 they owed to another account. Now the couple is wondering how to save for retirement, whether they should buy a house and how to pay for Tom's son's college costs in two years.
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Dave's Action Plan
1 | Write a budget. It should include an emergency fund and an immediate payoff to the IRS.
2 | Be realistic about college. "Tom's son should apply for a ton of scholarships and select an in-state school or community college to keep costs down," says Dave.
3 | Get cheaper digs-and wheels. The Paynes are carrying a $22,000 car loan on a Saab and a Cadillac. Dave suggests they sell one of the cars and move to an even cheaper place.
4 | Focus on debt. Retirement saving and house-buying must wait. But if the Paynes keep at it, Dave says, he sees a house in their future, as well as retirement money.
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