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Effective Ways to Cure a Financial Hangover

I have not republished any new articles from my good friend Alvin Tabanag lately and I find his articles very helpful to everyone.  To start this new year let me help you out by sharing this article he wrote on how to get over from your financial problems.

I know that a lot of us wanted to have better finances not only for our love ones but also for ourselves.  Greater finances means the ability to spend more quality time with people we love and also prepare for the future.  Here's Alvin Tabanag's "12 Ways to Cure a Financial Hangover."

The holidays are officially over and many are probably wondering: “where did all the money go?”  And it could be worse for thousands of Filipinos.  Not only is there no money left, there are tons of debt to pay. It’s quite easy to overspend during the Christmas season because you feel richer and more generous than at any other time of the year.  Add to that the festive atmosphere wherever you go and sales events left and right, it’s hard not to be tempted to spend.  No wonder, then, that many greeted 2012 with a nasty financial hangover from overspending.  Unlike a hangover from alcohol which goes away after several hours or a day, a financial hangover lingers much longer.  In some cases it could hang around for years!

Here are twelve steps that can help cure your financial hangover.

1. Give yourself a smack on the head.  You only have yourself to blame for getting in a financial jam.  Surely, you didn’t think that spending recklessly during the holidays is not without consequences.   True, there’s no point in crying over spent money but it doesn’t hurt either to remind yourself that you did a really poor job in handling your finances during the Christmas season.

2. Look back and figure out what happened.  You can avoid a financial hangover next year if you learn from the mistakes of the past.  So review how you spent your money last year.  Determine which expenses you could have avoided.   Try to analyze what made you spend on those things so you can steer clear of these circumstances in the future.

3. Asses the financial damage.  Now would be a good time to take stock of your financial condition.  Find out how much funds you have left, if any.  More importantly, list down all your debts even if it makes you comfortable.  You will not be able to solve a problem if you keep avoiding it.  Include in the list the balance, interest rate, installment amount or minimum payment required, and the payment due date for each debt.  This should give you a pretty good idea of how much you really owe and how much you need to pay every month.

4. Set specific, realistic goals.  Of course you want to get rid of your debts as soon as possible.  But with limited financial resources it will probably take you years to completely free yourself from these financial obligations.  Set a target that’s challenging but manageable, something that you can commit to it.  Setting a goal that’s too high can only lead to frustration.  Reducing your credit card debts by 20% or paying in full one credit card in the first quarter of 2012 looks realistic enough.

5. Reduce spending.  So you’ll have extra money to pay for your debts revisit your spending plan (or make one if you don’t have any).  Identify which budget items can be reduced or dropped for now.  Good candidates for reduction or removal would be those expenses you really don’t need like budget for cigarettes, booze, gambling, expensive coffee, designer clothes and other pricey brand items.  In the next three to six months avoid mall sales to avoid overspending.  You really don’t save by buying something at a discount, especially if you don’t need it.  You save by not spending.  Any money (or at least most of it) that becomes available as a result of spending more wisely should be used to pay off debts.

6. Make extra payments on your credit cards.  Pay off credit card dues faster and save a lot on interest charges by paying more than the minimum amount.  A P30,000 credit card debt will take more than 8 years to wipe off if you just pay the minimum amount and you end up paying more than P46,000 in interest alone.  Pay double the minimum and you’ll be rid of this debt in less than 3 years and pay only P11,400 in interest.

7. Decide on a payment strategy.  If you are paying off multiple debts simultaneous figure out to which debt you will make those extra payments.  One strategy is to pay off the one with the highest interest first.  This results to bigger savings because you will be rid of the high interest payments faster.  Another strategy is to pay the one with the lowest balance regardless of the interest rate.   This is not financially logical but having one less debt to worry about even if it’s a small one will give you a big psychological boost and motivate you to keep on making extra payments.

8. Reduce the cost of your debt.  Consider transferring your credit card dues to another card that charges a lower interest.  Or you can ask your card company for a lower interest rate.  If they won’t give in then you can proceed to transfer the balance to a cheaper card.  You may also consider borrowing money to pay off your credit card debt as long you end up paying a lower interest.  For example, you can take out a salary loan which charges only 10% per year to pay in full your credit card balance which charges 3.5% monthly or 42% per year.  If you want to borrow no-interest money try your relatives and friends.

9. Avoid adding to your debt.  Stop using your credit card for now.   I know this will not be easy to do especially if you are often short on cash.  But you will just have to try harder. You will not be able to reduce your debt significantly if you keep adding to it.

10. Use your savings to pay your debt.  There’s no sense in keeping your money in an account that only pays less than 1% per year while you are paying 3.5% monthly interest on your debt.  So use that money.  Just make sure you keep enough funds for financial emergencies.  An emergency fund equivalent to 3x your monthly income should be fine.  Consider also other sources of funds to pay for your debt like selling some of your stuff.  Do you really need to have four high-end cellphones?

11. Seek help.  If you are not quite sure how to handle your financial problems it makes good sense to consult a financial planner.  He can diagnose your problem in more detail and explain to you what solutions are available.   He can recommended the right strategies and present other ideas which you may not have considered before.  One of the pitfalls of financial problem solving is assuming that you know what you are doing when in fact, you don’t.    Instead of going the right way you could be moving in the opposite direction.

Besides a financial planner you can also benefit from an “accountability partner” who will help you keep your commitment to stick to the plan.   The accountability partner can be your spouse, your parent, your son or daughter, a relative, friend or officemate.  Find someone you can trust, someone who can motivate you and give moral support but won’t hesitate calling your attention (or smacking you in the head) when you start deviating from the plan.

12. Start planning for the next holiday season now.  You can avoid another nasty financial hangover next year if you start preparing for the holidays way ahead of time.  As soon as you have reduced your debt to a more manageable level start a holiday season fund and add to it regularly.  By the time the next Christmas season comes around you will have accumulated a substantial amount and you won’t have to rely on your bonus or credit cards for your holiday spending.
 Don't forget to visit his website at www.pinoysmartsavers.com.

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