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Bailing out your household budget

By Michael Rupured
University of Georgia

Until a few months ago, many people considered spending less than they earned only an option. Credit made up the difference, sparked by confidence that income, home values and the return on investments would keep going up. With lay-offs, high foreclosure rates and an extremely volatile stock market, some are now learning what goes up must come down. Many household budgets are in serious need of a bailout.

It remains to be seen if and when consumers will benefit from state or federal bailout plans. In the meantime, there are things you can do that can make a big difference in your monthly bottom line. Now is the time to develop and to implement your own bailout plan. Here are some suggestions to start the New Year right.

Evaluate your mortgage and home equity debt. Interest rates are low. If you have an excellent credit score and sufficient equity in your home, now is a good time to consider combining and refinancing any outstanding balance on your home mortgage and home equity loans. In general, you should consider refinancing if the interest rate on your current loans is at least two points higher than market rates.

Unlike mortgages, the interest rates on non-mortgage loans and credit cards remain high and are going up. Using the equity in your home to pay non-mortgage debt is an option, but it is also one of the causes for the current mortgage crisis. Until housing prices stabilize, it’s wise to keep your home equity level to at least 20 percent of the current value of your home.

Pay off credit cards. The credit crunch is leading credit card providers to reduce credit limits for many credit card holders. Having your credit limit reduced impacts your available credit, which lowers your credit score. When your credit score drops, many lenders will raise the interest rate on your credit card, making it harder to get out of debt.

To get out of debt you need to stop using credit. Make the minimum monthly required payment on all of your credit cards, but pay as much as you can on the one with the highest interest until it is paid off. Paying the same amount each month until all your credit cards are paid off will get you out of debt quicker and significantly reduce finance charges.

Scrutinize household bills. Take a hard look at your statements for telephone service, cable television, Internet access, natural gas, electricity, water, trash collection, newspapers and bank accounts. Eliminate services you do not use, need or can live without. Shop around for a better deal.

Track your spending. Most families can save as much as 20 percent just by paying more attention to how they spend their money. Small, frequent purchases can add up. When you identify an area of overspending, give it up or find a cheaper alternative. You can also economize to reduce the cost, barter or trade or use a free or low-cost community resource instead.

Establish an emergency savings fund. Up to now, many people used credit to finance unexpected expenses. Financial experts recommend keeping three months to six months of living expenses in an easily accessible account. With six months of expenses in the bank, a lay-off or medical emergency is less stressful. The additional savings also enables you to raise insurance deductibles, which lower your premiums.

A comprehensive review of your household budget will help you develop your own bailout plan. Be sure to involve everyone in the household in the discussion. You may be surprised at the great ideas your kids come up with, especially if they share in the rewards of any savings through a family outing or fun activity. They are also more likely to follow through on any plan if there is something in it for them.

(Michael Rupured is a consumer financial expert with University of Georgia Cooperative Extension.)

(Michael Rupured is an Extension financial management specialist with the University of Georgia College of Family and Consumer Sciences.)

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