Photo: Courtesy of Michelle Singletary
Financial columnist Michelle Singletary maps out a financial rescue plan for our latest Make Me a Ten! makeover candidate, Tisa McGhee, a single mother of two who has lost her job and watched her debts pile up. Here's what you can do if you're in a similar position.
In the Short Term
1. Stick to a budget. I started by giving Tisa a blank financial worksheet to fill out. By looking at the full financial picture, I saw some expenses she could cut. First, she's paying $220 a month for cell phones for herself and her daughters. She should stick with the cheapest plan—no downloading ring tones, surfing the Internet, or texting for the girls. Second, she has to cut back on restaurant meals, one of the most common ways people waste money. Third, she needs to spend less on transportation. Ideally, 6 to 15 percent of your net income should go to transportation costs (including your car payment, gas, and insurance); Tisa is spending more than 18 percent. I also advised her to make a list of top priorities and, every time she's tempted to buy something, pull out that list and look at it.
2. Stay on top of the mortgage. Part of Tisa's trouble is her adjustable-rate mortgage. When housing prices were rising, a homeowner could refinance when interest rates went up. But once home prices began to fall, that was no longer an option for many borrowers. While Tisa's interest rate was rising, the value of her home was dropping—from $302,000 to about $230,000 by last November, according to an estimate by Zillow.com . Thanks to her emergency fund, she was able to keep up with the higher mortgage payments until August 2008. But then she stopped paying, and the lender began foreclosure proceedings. She eventually sought help through the Obama administration's Making Home Affordable program ( MakingHomeAffordable.gov ), which allows strapped borrowers to refinance or modify their mortgages. Tisa's lender offered to lower her monthly payment from $3,180 to $1,747; she began making the new payments last July but stopped because her lender never sent her the proper paperwork. I suggested Tisa turn to NeighborWorks America ( NW.org ), a nonprofit that helps consumers avoid foreclosure, and the agency intervened. If you are having trouble paying your mortgage, you can also contact a free counselor approved by the U.S. Department of Housing and Urban Development (find one through HopeNow.com or at 888-995-4673).
3. Stop making extra debt payments. Tisa has been trying to dig herself out of debt by paying more than the minimum on her credit cards. Normally that would be smart. But because she is unemployed, I advised her to preserve as much cash as possible, making basic expenses—food, housing, utilities, and transportation—her highest priority.
4. Get financial counseling. Tisa needs to work one-on-one with a credit counselor. Counselors with the National Foundation for Credit Counseling can provide free or lowcost debt help. To find a counselor, go to DebtAdvice.org or call 800-388-2227. Look for accredited counselors who have independent certification and training in budgeting, consumer credit, and debt management.
Next: Singletary's long-term financial plan for McGhee
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