BUILD UP FINANCIAL RESERVES

After you transfer balances from the higher-interest cards to the lower-interest cards, cut up the old cards, mail them back to the banks, stores, or companies that issued them, and close the accounts. The only potential exceptions are the cards necessary for identifcation, business, or emergencies (the cards with a zero balance). Otherwise, do "plastic surgery" and get rid of as many cards as possible. Don't just throw them out. You need to mail the cut-up cards back to the banks to get the accounts closed and off your credit report.

If you belong to a credit union, fnd out what types of loans are available. You may be able to get a personal loan at a rate far lower than what you're paying in credit card interest and use the money to pay off high-interest cards. (Don't forget to add repayment of the loan to your budget.) If you've been a member in good standing for some time, you could even get a loan at a rate lower than what a bank would offer. The credit union may even offer a bill-payer loan or consolidation loan.

Managing your debt efficiently is our goal here, but it’s easy to get too aggressive. Don’t assume you can apply all your excess income to debt retirement. You’ll never get out of debt if you don’t start to build some reserve for the items that got you in debt to begin with. The usual suspects are repairs and maintenance for home and autos, vacations, gifts, and clothes.

No matter how focused you are on debt management, you should be setting money aside every month for these irregular expenses. After all, making sure you don’t have to borrow money to pay your plumber or auto mechanic is a way of debt management as well.

Dubious as we are about debt, we do recognize that most of us need to borrow for our major purchases—home and cars. Owning a home is the American Dream; the opportunity to own spacious homes, without sharing them with other families, is one of the distinguishing characteristics of our society. To that we say: Go for it, but be mindful of your other goals.

For example, a large home may require a mortgage of 20 years, 30 years, or more. If you’re planning for extensive mid-life travel, your ability to afford that may be affected by the need for ongoing mortgage payments. Or let’s suppose one of you wants to quit your job to stay home with the kids. You may have enough money for your down payment, but with your joint income reduced, will you be able to make your mortgage payments?

Larger homes also mean greater home maintenance costs. If only one of you is working, will the upkeep of your home be affordable? All we’re suggesting here is that you think about the consequences of purchasing an expensive home—and the trade-offs your purchase may require. That sort of balancing act is a constant as you implement and modify your budget.

If you have a mortgage that can be paid off early with no penalty, then refinancing is a possibility if interest rates drop. Refinancing your home consists of taking out another loan at a lower rate to pay off the earlier, higher-rate mortgage. (As with any mortgage procedure, you're charged fees, so take this into account when refinancing. Find out whether the costs can be rolled into the mortgage while still offering reduced monthly payments.)

Refinancing a mortgage is advantageous in that it not only can free up money for your current diffculties, but also can lower your payments for the duration of the mortgage, which helps you get your monthly debt obligation closer to that desirable 25 percent fgure.

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