Credit Card Report
Financial News Made Easy

Some would consider it a fate worse than death-calling it quits on hair dye at age 50.

But when Sue Stevens stopped going to the salon for monthly silver cover-ups, she didn’t view it as a sacrifice.

Instead, she sees her untouched silver locks as $100 in savings a month, a way to keep debt from mounting and an opportunity to grow an extra $1,200 a year into about $63,000 for her nest egg over the next 20 years.

She decided to dump the dye during one of her self-imposed financial cleanups a few months ago.

Whenever credit card bills start getting difficult to pay off completely, she looks over every credit card and checking account entry one by one, asking herself: "Am I getting the enjoyment out of this that I should?"

If the answer isn’t a clear-cut "yes," she doesn’t continue to buy the item, because she cares more about saving enough money for her future than unfulfilling purchases.

"I’m not reading them and they are just piling up," she says.

In a nation where roughly half the people with credit cards carry a balance from one month to another and the personal savings rate has declined below zero, Stevens may seem like a bit of a prude as she slashes magazine subscriptions and hair dye from her budget.

But she’s a Deerfield financial planner practicing what her profession preaches-restraining spending so debts don’t sneak up and erode her ability to save what she will need, or want, for her future, especially retirement.

There’s a rule of thumb in financial planning that if debt-other than the mortgage and student loans-exceeds 10 to 15 percent of take-home monthly pay, the person needs to start whittling the balance down.

And credit card debt is considered too high when it can’t be paid off within a year, says Laura Tarbox, a financial planner who trained other financial planners for more than 20 years at the University of California at Irvine.

Stevens is even more rigorous than that with her own money, because she knows that interest on credit cards and loans, if left unchecked, will make her pay repeatedly for what she bought yesterday, and keep her from buying what she wants tomorrow.

For example, if a person buys $2,000 in furniture and pays $40 a month at a 19.8 percent interest rate, she will spend about $4,080 for that single purchase over the next eight years.

That’s about $2,000 that could have gone toward another piece of furniture or significantly boosted retirement savings.

To get there, the investment would have to grow the way the stock market has done historically-about 10 percent on average annually.

"I’m a spender by nature," says Stevens and, like most Americans, she isn’t eager to deprive herself.

But she doesn’t feel deprived, because she relishes seeing hundreds of dollars in savings turn into thousands.

And then, of course, there’s her methodology for making cuts: When she eliminates any purchase, it’s after she honestly evaluates what it means to her, so she doesn’t feel any loss.

With the dye, for example, she experimented with silver first, curious about what it would look like after more than two decades of bottled color.

Only after deciding she liked the results did she scratch the expense from her budget.

Stevens urges clients to go through the same analysis with their purchases, and she has assembled a list of over 100 fairly painless cuts, from "ordering vegetarian when out" to eliminating home phone service if you have a cell phone.

People often are surprised at how easy it is to produce a couple of extra thousand.

Recently, for example, Stevens was helping a struggling single mother try to wring extra savings out of an over-stressed paycheck, and she found an quick $2,700.

The money had been going for after-school child care.

"Was it necessary to have child care for a daughter who was already babysitting for other people’s children?"

The spending had just taken on a life of its own, and inertia had been draining potential out of the mother’s paycheck.

The goal is to stop inertia before it goes too far.

Sherry Schutt didn’t do that, and with $16,000 in credit card debt and children approaching college age, she’s feeling guilty because she’s going to be paying down debt instead of helping with tuition.

Throughout their childhood, if her four children wanted anything "I didn’t think about it; I just used the credit card," says Schutt.

"Or I’d see something on sale, and use the card.

Then the bill would arrive with $2,000 on it, and I’d wonder: ‘Where did I spend it?’

Twice she and her husband, Patrick, tried to get rid of her credit card debt by consolidating it into the mortgage for their Niles home.

In retrospect, Schutt realizes that consolidating debt was just another invitation to take on more debt.

She estimates she and her husband spent about $30,000 on the costs related to the transactions, and soon afterward she was using the credit cards again.

It wasn’t long before the balance was up to $16,000, and she was using household money to try to pay unmanageable bills.

She started taking it seriously when her mother-in-law went through her three closets, pointing out unworn clothing still carrying price tags, and shoes and handbags for every outfit.

She sought a way out at Consolidated Credit, where she is on a payment schedule.

She can’t use credit cards again; if there is shopping to be done, her husband does it so she’s not tempted.

Somnath Basu, a business professor at California Lutheran University, says too many people are refinancing their homes and using home-equity loans inappropriately.

They look only at lower monthly payments and decide that’s a quick fix, he says in an issue of the Journal of Financial Planning.

Yet, people must realize the money from their home equity isn’t free, notes Basu.

If they refinance or take a home-equity loan, they must pay closing costs and interest over a long period of time.

So dumping the car loan into the mix, and paying interest for 10 or 30 years, could be a mistake if the original auto loan is supposed to be paid off in only three years.

Also, if people do borrow against their home equity, it will work in the long run only if "they have iron discipline," Basu says.

With lower monthly payments, money will be left over, but every cent needs to be used to pay down any other debts, like car loans or credit card balances.

"Think of it as a good diet with exercise," he says.
The Center for Retirement Research at Boston College has researched retirement saving and found that 43 percent of American households are so far behind they will not have enough money at retirement to maintain their lifestyles.

While low-income people may not have enough income to save adequately, even people with relatively high incomes are shortchanging their futures.

A survey done for the Consumer Federation of America in 2000 showed that 31 percent of American households with incomes over $100,000 weren’t saving enough to keep their standard of living up when they retire.

Financial planners urge their clients to have enough savings when they retire to replace at least 80 percent of the pay they were receiving just before retiring.

For a person earning $100,000, that would mean having $1.2 million saved, says Charles Farrell, a Medina, Ohio, investment manager and author of a recently published Journal of Financial Planning article on the impact of debt on saving.

To be able to build up the necessary level of savings, Farrell says consumers need to limit their debts throughout their lives so they have enough cash to stash away.

To get there, Scherer had her increase the hours she works as a nurse and stop using credit cards.

About 4 percent of her income is going toward retirement savings, and about 8 percent is going toward paying down her debts.

Another 4 percent is building up a savings account to cover emergencies.

The emergency savings are critical, says Scherer.

Something always arises that can cause a person to haul out the credit cards again and upset their debt-payment plan if there is no backup fund.

People who try to pay off debt and don’t have money for contingencies are forever going back into the red.

In three years, when Michael’s last credit card is paid off, she will devote every cent that’s been going toward debt payments to retirement savings-16 percent of her pay.

Even so, she won’t be able to retire at 65, but she probably can work shorter hours and retire at 70 if she wishes, says Scherer.

While she won’t be able to replace 60 percent of her income in retirement as Farrell prescribes, she is on course to achieving 50 percent.

For the first time in years, Michael says she’s relieved about her future.

"I used to feel like I was going to work to get money to pay my bills.

Now, I make money to improve the quality of my life."
- Summarired from: Gail Marksjarvis, Being smart about saving: The little things add up, Chicago Tribune, Oct. 15, 2006.