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Cut, cap and balance your own budget

by Michele Lerner

While your individual credit card debt will never approach the trillions of dollars of debt the U.S. government has incurred, no matter how big or small your credit card balance is you probably want to eliminate it. There are a variety of available approaches to eliminating your personal deficit. Each one requires you to take steps to spend less money and to apply the savings to your credit card payments.

The U.S. House's "cut, cap and balance" prescription for the federal budget requires:

  • Spending cuts to reduce the deficit
  • Spending caps that are meant to keep the government on the path to a balanced budget
  • A balanced budget amendment to the U.S. Constitution

Luckily, you don't have to depend on Congress and the executive branch to agree on changes to your own personal financial plan. You can start working your way toward a balanced budget without amending anything other than your spending and saving pattern.

Cut

Begin by reducing your spending, starting with the biggest expenses such as housing costs, transportation and food.

  • Housing. If you have the space, you can consider bringing in a tenant or a roommate to share costs. If you rent, you may want to move to a cheaper apartment. 
  • Transportation. If you lease your car, you may not have many options, but if you are paying off a car loan you might be able to refinance the loan to lower your monthly payments. Car pool and combine errands into one trip to save on gas. Look into alternative ways of paying for public transportation such as a monthly pass or an employer subsidy that could save money. 
  • Food. One of the fastest ways to slash your spending is to stop picking up coffee and snacks, bringing in carry-out meals and dining out. Making your own drinks and food can save a lot, and careful use of a shopping list and coupons can make your grocery trips less costly. 

 Cap

Vow to stop over-using your credit cards today.  Even the best credit cards of 2011 can have the effect of a chainsaw on your finances when misused.  Then look for an option to pay the balance down faster, such as:

  • A balance transfer credit card. A credit card balance transfer from a high interest card to a zero percent interest or low interest rate can save you money and help you pay off your credit card debt faster. Just be sure to check the fees and the length of the low or zero interest term when comparing a balance transfer offer. In addition, you should check to see what the interest rate will be when the card reverts to normal interest rates just in case you cannot pay the balance in full before the initial transfer period ends. 
  • Pay the maximum, not the minimum. Make sure you devote as much of your cash as possible to reducing your credit card payment. Your new balance transfer card may have a lower minimum payment, but you should keep paying at least as much as you paid on the old card. 
  • Stop making charges. Part two of the cap, after you have transferred your credit card balance from one creditor to another, is to stop adding to your credit card debt. If you can't pay off your entire balance, even the best credit card rewards aren't worth the interest you'll incur on new debt.  Don't charge anything on your old card even though you have available credit and don't add to the balance on your new credit card.

Balance

To balance your personal budget, you will need to align your spending and saving with your income to make sure your expenses do not outweigh your earnings. This balancing act requires a four-pronged approach:

  • Income. Congress's cut, cap and balance plan limits the ability of the government to raise revenue with new taxes. The slow job market, along with the absence of regular raises, could curtail your ability to increase your revenue stream. You can try to find a second job or perhaps work overtime, or sell some items on eBay or Craigslist to generate some temporary extra cash.
  • Spending. Reducing the amount of money you pay for discretionary items and keeping a tighter rein on the amount you spend on mandatory costs such as food, housing and transportation can help you get your finances in alignment.
  • Debt reduction. Reducing the amount of money you must send to creditors each month will eventually result in a greater ability to save for future needs and to spend carefully on things such as vacations and outings with friends.
  • Savings. While your debt reduction plan may take precedence for a little while, be sure you build an emergency fund so you can avoid using your credit card when your car or your air conditioning needs repair. As your spending for credit card debt is reduced and you become more frugal, you can direct more money into savings and investments.

The cut, cap and balance strategy may or may not rein in the monstrous federal budget, but it could have a dramatic influence on your credit card debt and your personal budget.

 

Published 07/27/11 (Modified 08/02/11)


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