Get a Grip on Your Financial Life

Good money management is great for your future. Start today by tidying up your debt.

It’s been a year (and wow, what a year) since “financial meltdown” and “credit crisis” entered our daily vocabulary.

For some, the last 12 months have been a wake-up call about the dangers of depending on easy credit. Others found out they’ve been hitting the snooze button when it comes to putting money away for a rainy day. And for still others, that “rainy day” arrived in the form of job loss and piles of unpaid bills.

But, even in the midst of a recession, there are some positive signs the sun will shine a little brighter in 2010. Earlier this year, the Federal Reserve reported that Americans reduced their credit card debt by 10 percent, something that has only happened once before in the past four decades. And over the summer, the Fed reported that the personal savings rate had jumped to 6.9 percent, the highest it’s been in 15 years.

With that in mind, why not take some steps now to dump your debt and grow your savings with the tips and strategies that follow—and make 2010 your year of financial order!

Feed the Beast (Within Reason) Let’s be clear: debt, whether it’s an auto loan or a credit card, isn’t a bad thing. Many of us couldn’t purchase a home or buy a new car without some sort of financing. And credit cards are hard to beat for safety and convenience.

The problem is credit can trick us into thinking we’re able to buy more than we should, easily luring us into a champagne lifestyle when what we actually have is a beer budget.

Many of us fall into the “I’m-making-the-minimum-payment-so-I-must-be-okay” trap. But simply sending the bare-bone contribution each month won’t pay off your debts. In fact, only a couple of dollars go toward the principal; the rest falls into the bottomless pit of interest payments.

Add in the incredible power of compounding (interest on top of interest) and something truly scary happens: you could actually continue making minimum payments on a debt and never pay it off!

For example, let’s assume you run up a $4,000 balance on a credit card with an APR (annual percentage rate) of 12 percent and make a minimum contribution of $40 per month. With this monthly payment, the entire amount will go toward interest, and the original balance will remain unpaid indefinitely.

How Much Is Too Much? If you’re using credit to meet basic needs (groceries and utilities, for example), you’re probably racking up too much debt. Ditto if you’re tapping your cards to finance a high-flying lifestyle you otherwise couldn’t afford.

Fortunately, you can use a simple number to quickly determine your debt load. Your debt-to-income ratio is exactly what it sounds like: the amount of debt you have compared to your overall income.

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