I appeared on Good Morning America today in a segment that featured Leah West, a Massachusetts mom of three that I am coaching. Leah was divorced seven years ago and since that time earned her bachelor's and master's degrees, leading to a good job in health care administration. She also ended up with more than $82,000 in debt, mostly student loans.
We started out focusing on what Leah values most, and talked about how to arrange her finances to reflect those priorities. We zeroed in on just a few manageable goals to set her finances on the right path. You can view the segment here, and check out my tips for Leah here.
After the segment aired, I received an email from a viewer, the mother of a three-year-old who has been put on bedrest due to complications with her second pregnancy. She earns most of the family's income, and her disability coverage doesn't replace 100 percent of her salary.
"We are now panicking about how we will survive while I am on disability with a mortgage, car loan, student loan, credit card bills," she wrote me. "We also have a three-year-old who was just recently diagnosed with Autism and he has a lot of needs that are not covered by insurance at all. We have tapped out our savings and are now living on paycheck to paycheck with my husband's salary."
Her situation underscores why it's crucial to eliminate revolving debt and build up an emergency fund equal to three to six months of your living expenses. You never know when a medical situation or a layoff can strike. Take it seriously — no revolving debt, period. (That includes car loans — I save up the cash and buy used cars.)
How do you do it? Try eliminating a few expense categories entirely for a period of three months — eating out, clothing and cable (ask the cable company to put your service on vacation mode). Put any extra income you can find toward debt paydown — whether it's a raise, freelance work, a bonus, a tax refund, selling items on Craigslist or eBay, even something as small as a product rebate. (Even saving your change in a jar and using the cash to pay down debt at the month's end helps.) Or make a radical change, such as splitting the rent with a roommate, renting out a space in your home or selling a second car.
Once the debt is eliminated, try setting aside 1/12th of your expenses each month (so if you spend $3,600 a month, save $300). By the end of the year you'll have one month's emergency fund. Stay the course, toss in any extra income you can find, and you'll build a rainy day nest egg before you know it.
If your finances are out of control and you're getting deeper into debt every month, contact the National Foundation for Credit Counseling at nfcc.org.
Have you gone on a successful debt diet? What strategies worked for you?