Financial columnist Michelle Singletary maps out a financial rescue plan for Make Me a Ten! makeover candidate, Tisa McGhee, a single mother of two who has lost her job and watched her debts pile up. Here's what you can do if you're in a similar position.
In the Short Term
1. Stick to a budget. I started by giving Tisa a blank financialworksheet to fill out. By looking at the full financial picture,I saw some expenses she could cut. First, she's paying $220 amonth for cell phones for herself and her daughters. She shouldstick with the cheapest plan—no downloading ring tones, surfingthe Internet, or texting for the girls. Second, she has to cutback on restaurant meals, one of the most common ways peoplewaste money. Third, she needs to spend less on transportation.Ideally, 6 to 15 percent of your net income should go to transportationcosts (including your car payment, gas, and insurance);Tisa is spending more than 18 percent. I also advised her tomake a list of top priorities and, every time she's tempted to buysomething, pull out that list and look at it.
2. Stay on top of the mortgage. Part of Tisa's trouble is heradjustable-rate mortgage. When housing prices were rising,a homeowner could refinance when interest rates went up. Butonce home prices began to fall, that was no longer an option formany borrowers. While Tisa's interest rate was rising, the valueof her home was dropping—from $302,000 to about $230,000by last November, according to an estimate by Zillow.com.Thanks to her emergency fund, she was able to keep up with thehigher mortgage payments until August 2008. But then shestopped paying, and the lender began foreclosure proceedings.She eventually sought help through the Obama administration'sMaking Home Affordable program (MakingHomeAffordable.gov), which allows strapped borrowers to refinanceor modify their mortgages. Tisa's lender offered tolower her monthly payment from $3,180 to $1,747; she beganmaking the new payments last July but stopped because herlender never sent her the proper paperwork. I suggestedTisa turn to NeighborWorks America (NW.org), a nonprofitthat helps consumers avoid foreclosure, and the agency intervened.If you are having trouble paying your mortgage,you can also contact a free counselor approved by the U.S.Department of Housing and Urban Development (find onethrough HopeNow.com).
3. Stop making extra debt payments. Tisa has been tryingto dig herself out of debt by paying more than theminimum on her credit cards. Normally that would be smart.But because she is unemployed, I advised her to preserve asmuch cash as possible, making basic expenses—food, housing,utilities, and transportation—her highest priority.
4. Get financial counseling. Tisa needs to work one-on-onewith a credit counselor. Counselors with the NationalFoundation for Credit Counseling can provide free or lowcostdebt help. To find a counselor, go to DebtAdvice.org. Look for accredited counselors who haveindependent certification and training in budgeting, consumercredit, and debt management.
In the Long Term
1. Stop using shopping as therapy. Emotional spendingcauses a lot of people to end up in serious debt. Seventy-ninepercent of women go on spending sprees to cheerthemselves up, according to a 2009 study released by theUniversity of Hertfordshire, in England. Forty percentof the women surveyed named "depression" as a reason togo shopping.
2. Save to buy a used car. Tisa, who has spent almost$30,000 over the past six years on two leased cars, needsto eke out some money to pay cash for a used car when hercurrent lease is up. Yes, you can lease a car for less eachmonth than it would cost you to buy the same vehicle, butat the end of that lease, you have no car. In the long term,buying a car and keeping it for years saves more money.
3. Aggressively pay down debt. After Tisa starts workingfull-time again, she needs to follow what I call theDebt Dash Plan: List your debts, starting with the smallest.Take all the extra money you can find in your budget andapply it to that debt, and make only the minimum paymentson your other debts. When you pay off the first debt,move on to the one with the next lowest balance, and so on.This strategy works because people get an emotional boostfrom eliminating one of their debts quickly, which motivatesthem to stick to their debt repayment plan.
4. Pay down student loans. Once Tisa is back on herfeet financially, she must start paying off her studentloans, because the interest is killing her. An income-basedrepayment plan for her federal loans will cap her monthlypayment at an affordable amount based on income andfamily size. (For information about this plan, go to Ibrinfo.org) Her lender will determine her eligibility and howmuch she must pay each month. (But, in exchange for lowermonthly payments, she may end up paying more interestthan under a standard ten-year repayment plan.)
5. Build the consulting business. Tisa has already startedher business, Mc3 Consulting Inc., which teaches nonprofitshow to improve their services and internal operations."Mc3 Consulting is the seed I am planting for mygirls," she says. "I want them to see their mother be successfuland show them that we can turn this situationaround. I want them to learn from my mistakes." Tisa has agood business plan and great contacts, but until she hasenough contracts to cover all her expenses and debt, sheneeds to pursue and stay in a full-time job. She should continueto seek advice, especially to steer clear of tax problems.One place to start is score (Score.org), a nonprofitassociation of working and retired executives and businessowners who donate their time to advising entrepreneurs.Tisa has been financially solid before, and she can do itagain. She needs to set a budget, get rid of her debts, andkeep spending in check. Recognizing her issues is a big partof the battle. "A combination of factors led me to where Iam today," she said, "but I can't regret those things. They'rehelping me become the woman I hope to be someday."
Michelle Singletary is the author of The Power to Prosper: 21 Days to Financial Freedom. For more information visit MichelleSingletary.com
Please note: This is general information and is not intended to be legal advice. You should consult with your own financial advisor before making any major financial decisions, including investments or changes to your portfolio, and a qualified legal professional before executing any legal documents or taking any legal action. Harpo Productions, Inc., OWN: Oprah Winfrey Network, Discovery Communications LLC and their affiliated companies and entities are not responsible for any losses, damages or claims that may result from your financial or legal decisions.
