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How to Survive 7 Big Budget Busters
Financial stress doesn’t result just from credit cards. Truly serious problems arise because you don’t plan properly for the most important, fixed costs in your life.
By Liz Pulliam Weston (As seen on
MSN.Com)
Most budget advice focuses on carving savings out of your discretionary spending -- how much you blow on lattes or health clubs or eating out.
But interviews with credit counselors and bankruptcy attorneys show it’s more often the expenses you consider fixed or beyond your control that can cause you serious financial trouble.
These budget-busters can transform a household that’s getting by into one that’s insolvent and hounded by creditors. Here are the seven big offenders, and what you can do about them:
Too Much House
Soaring real estate prices, looser lending standards and smaller down payments mean many families are shouldering bigger and bigger mortgages -- sometimes to their peril. Foreclosures and delinquencies are at or near record highs as many people fail to make their monthly payments.
It’s not just the mega-mortgage that knocks people off track, said Steve Rhode, president of money counseling firm MyVesta.com. More expensive houses come with:
• Higher property taxes
• Larger insurance premiums
• Bigger utility bills
• More maintenance costs
Yet many people continue to struggle to keep a too-expensive house when a smarter solution might be to sell it and downsize, Rhode said.
Ideally, your basic housing expenses -- mortgage, insurance and taxes -- would eat up no more than 25% of your pretax income. Most lenders will allow you to spend 31% to 33%, although some now go as high as 60%. The bigger the mortgage bite, the more likely you are to run into trouble.
Too Many Kids
If money were the only consideration in whether to have children, few people would take the plunge. Fortunately, that’s not the case. But you do have to change how you budget your money when you have a child, or you can easily run aground.
In fact, bankruptcy expert Elizabeth Warren says married couples with children are more than twice as likely to file for bankruptcy as their childless counterparts. The Harvard law professor says having a child is now the single biggest predictor that a woman will end up in financial collapse.
It’s not just the little things, like car seats and soccer uniforms. You may need a bigger car to shuttle around those car seats, and a bigger house, with a yard, to raise those soccer fans. Insurance, food, clothing, medical costs -- all go up with a child.
“A child is definitely a capital expenditure that doesn’t go away,” said Dianne Wilkman, president of Springboard Consumer Credit Management.
How much a child increases your expenses typically depends on your income. The U.S. Department of Agriculture estimates a child born in 2002 will cost the following amounts to raise to age 18:
• $127,080 for two-parent families with incomes under $39,700
• $173,880 for similar families with income of $39,700 to $66,900
• $254,400 for families with incomes over $66,900
These amounts, which are in 2002 dollars, don’t include paying for four years of college, which would add $40,000 to $120,000 to the tab.
Advocates of frugal living will say you can raise kids on a lot less. Families living in expensive cities and opting for private schools or child-care will tell you it also can cost a lot more.
In fact, a family living in urban California or New York with a six-figure income can spend $1 million raising and educating a child.
You can use calculators like the one at Babycenter.com to estimate how much you’re likely to spend on your child. Or you can just figure on spending an extra $10,000 a year or so per child. (See link at left under Related Web sites.)
Either way, you need to make room in your budget for your wee ones. It may mean fewer vacations or dinners out, but you can’t spend the way you did when you were childless unless you make a lot more money. Frugal living books such as Amy Dacyczyn’s “Tightwad Gazette” series and Web sites such as The Dollar Stretcher offer tips for living cheaper with children.
Too Much Tuition
This, of course, is Child-Rearing, Part Two. And the costs of education begin well before kindergarten:
Buying the right house.
If you opt for public school, you’ll probably want a decent school district, and that usually means paying more for your home. Houses in good districts sell at a premium in most markets.
Paying for preschool.
Educators say preschool boosts chances for later school success, and two out of three kids now attend. But preschool is rarely publicly funded and may cost several hundred dollars a month.
Opting for private school.
For religious, personal or academic reasons, you may prefer private elementary or secondary school education. Tuition can cost $10,000 or more for elementary grades and go up from there. Then there’s college.
Parents naturally want the best for their children and often resist the idea of scaling back, Rhode said, even when it’s clear they can’t afford the options they’ve chosen. If you’re borrowing to pay pre-college education expenses, you’re spending too much. If it will take you more than 10 years to pay off college loans, you may need to consider less expensive options: a public university instead of a private one, or a couple years of community college before transferring to a four-year school.
Too Much Car
About 40% of the buyers of new cars owe more on their current vehicle than the car is worth. Add this to today’s longer loan terms -- 80% of car loans are for more than four years -- and you have millions of people taking big risks on their vehicles.
If they lose a job or otherwise can’t make payments, they can’t simply sell the car and downsize to a smaller vehicle. They’ll still owe money on their loans that has to be paid off somehow, and they don’t have any equity to get into another car.
The best cure for this situation is prevention:
• Don’t trade in a car until you’ve paid it off.
• Don’t buy a car you can’t pay off in four or five years.
• Consider driving each car for seven to 10 years.
Not Enough Marital Bliss
In the mid-1980s, a much-publicized study proclaimed women’s standard of living dropped 73% on average after divorce while their ex-husband’s rose by 43%. Those jaw-dropping figures were quickly proved to be based on some miscalculations and corrected to 27% and 10% respectively.
Many families, however, find both exes have trouble getting by when the same income must now make two rent or mortgage payments. Missouri bankruptcy attorney Gary Barnes sees many households who were on the financial edge during marriage get sent over the brink by divorce.
“They just can’t support two households,” he said.
Even if one spouse is able to get by, he or she can be brought down by the financial troubles of the other one. If joint accounts aren’t closed and mortgages refinanced, the bankruptcy of one ex can show up on the credit report of the other -- which means higher interest rates and more trouble getting credit.
Obviously, no one would advocate staying in an abusive marriage. But an investment in counseling could prevent a costly breakup for some couples. If divorce is inevitable, you can contain the damage by closing joint accounts
Not Enough Health Insurance
One out of seven Americans has no health insurance at all -- no private coverage, no Medicare, nothing. An accident or illness can be disastrous.
In fact, medical bills contribute to one out of five bankruptcies, according to studies by credit card behemoth VISA and by SMR Research, a business research firm that specializes in the consumer lending industry.
Health insurance itself is expensive, which is why so many people forgo it. A smarter choice might be to opt for high-deductible policies, which require paying the first $1,000 to $5,000 out of pocket but which protect you against catastrophic medical bills.
Not Enough Emergency Cash
More than 40% of American households have less than $1,000 in liquid, non-retirement savings accounts, according to an SMR Research study of Census Bureau data.
These paycheck-to-paycheck families are incredibly vulnerable to financial setbacks, credit counselors and bankruptcy attorneys say. A lost job, a car breakdown or any unexpectedly large bill can quickly become a financial crisis. Many of these households use their credit cards as a substitute for an emergency fund, but that works only until they’ve maxed out their cards or fallen behind on their payments. Then their card issuers jack up their interest rates and assess penalties, making the balances even harder to pay off. Some even lower credit limits, increasing the odds that customers will rack up over-limit fees.
These days, it only takes one late payment or maxed out card to wind up with higher interest rates on all your cards. That’s because issuers scan their customers’ credit reports, looking for evidence of financial trouble. A high balance or delinquency on one card is enough to induce the other credit card issuers to boost their rates.
A better solution is to start building an emergency fund now. Set up an automatic transfer so some of your paycheck winds up in a savings or money market account. Deposit any windfalls or tax refund checks until the balance is over $1,000. Once you’ve paid off any credit card debt, continue building your emergency fund until you have three to six months’ worth of expenses saved. It can mean the difference between surviving a financial disaster and going under.
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