Personal Finance - Trying to Tackle Debt Before Beginning to Save

When you have debt, every month you pay more in interest than you can earn in interest on your savings, and you fall further behind.

If your financial situation improves, start contributing to savings and retirement again. But for now, you must put every penny you have toward your essential living expenses and toward paying down your high-interest debts.

Moving your budget from red to black may require more than budget-cutting alone. The same is true if you can afford to pay only the minimum due on your high-interest debts.

When you pay just the minimum each month, it takes months, if not years, to pay off those debts, and you pay hundreds or even thousands of dollars in interest sterling that you could put to better use.

Increasing your household income: Get a second job, turn your hobby into a part-time business, or let your boss know that you would like to work more hours. If your spouse or partner is not working outside the home, discuss whether a paying job makes sense at least, until your finances improve.

Negotiating with your creditors: Some of them may be willing to lower your monthly payments or make other changes to help you afford to continue paying on your debts.

Consolidating your debts: Debt consolidation involves borrowing money to pay off high-interest debt and lower the total amount you pay on your debts each month.

Getting help from a reputable nonprofit credit counseling agency: Such agencies can help you develop your budget and may also suggest that you set up a debt-management plan.

Filing for bankruptcy: Bankruptcy should always be your option of last resort. When may it become your best option?

• If you're about to lose an important asset

• If your monthly expenses are so much higher than your income that it will take years of sacrifice and bare-bones budgeting before your debts are manageable and you have a little extra money left over each month

Financial experts agree that, in general, your basic living expenses and the total amount of debt you owe (secured and unsecured) should equal no more than a certain percentage of your net household income. (Net household income is your income after deductions for taxes and other expenses it's your take-home pay.)

When you're developing your budget, one way to pinpoint expenses to reduce is to compare your numbers to the following standard percentages. When you have a budget, you can also use the standard percentages to monitor the state of your finances over time.

If your percentages are a little higher than the ones on the following list, you don't necessarily need to worry because certain expenses may be higher in your part of the country. Housing, for example, varies greatly from place to place.

Some financial books and Web sites also may use slightly different percentages than these; no one correct set of figures exists. Percentages are just approximate amounts for you to use as spending guidelines:

Monthly housing expense: 25 percent of your net household income (35 percent if you take
into account homeowner's insurance, property taxes, home maintenance, and repairs)

Consumer debt (credit cards, student loans, medical debts, and so on): 10 percent of your net household income

Utilities: 15 percent of your net household income

Transportation: 15 percent of your net household income

Savings: At least 10 percent of your net household income

Everything else (food, clothing, medical insurance, prescriptions, entertainment, and so on): 25 percent of your net household income.

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