Tips for a Debt-Free 2012

“Don’t spend more than you earn” seems a common sense rule of thumb for avoiding going into debt. Except that all too many people don’t do that. Instead, they spend what they earn (let alone more) without putting away any savings. That’s a recipe for a financial “debt-aster.”

Among the biggest takeaways from the recession has been to not take on as much debt, according to a 2011 wealth level study of households with a net worth between $100,000 and $1 million conducted by Millionaire Corner. Fifty-three percent of respondents made this resolution. But easier said than done, especially at a time when the economy has not fully found its footing.

“It’s worse now (than before the 2008 economic collapse),” observes Neal Winston, CPA and a partner at Chicago-based Schneiderman, Kohn & Winston, Ltd. “People can’t get loans as easily, or they may have lost their jobs or had their hours cut back and they can’t pay as much into reducing their debt. Many people’s homes are underwater and they can’t refinance because they have to come up with cash, which they don’t have.”

Nearly three-fourths of baby boomers started saving more and spending less in the last year, according a report released at the end of 2011 by AARP. Emergency funds, retirement needs and declining income were most often cited as the reasons for changes in saving and spending habits.

Winston offered Millionaire Corner these tips for making resolution a reality for a debt-free 2012:

∙ Consider transferring the balance from a high interest rate credit card to one with a short-term low interest rate. Contact the credit company to see if there are any special promotions being offered.

∙Contact your credit card company about settling your balance. This is usually done when one’s credit score is low, or in the cases of job loss, bankruptcy, or the sale or foreclosure of a personal residence.

∙ Pay more than minimum balance and finance charges on all types of debt, including credit card balances, mortgages, and car loans.

∙ Take out a lower interest home equity loan, if qualified and have enough equity in one’s home to pay down credit card balances.

∙Consolidate various debts into lower interest rate loan when possible.

∙Consider extending length of payment terms, thus lowering monthly payment. This will not reduce debt as quickly, but it will make the payments more manageable.

Winston emphasizes the importance of contributing to a so-called “rainy-day fund.” A rule of thumb, he said, “is at least six months of savings, but I recommend a year’s worth to cover mortgage payments in case you lose your job.”