A key element to avoiding financial tangles is keeping your finances on an even keel through sound planning strategies. Sound finances are not necessarily achieved through an extraordinarily high income, or making a killing in the stock market or real estate. Many people have attained those goals, yet still find money slipping through their fingers at an alarming rate. Rather, a solid financial footing and the peace of mind that comes with it are the rewards of sensible, sound financial planning.

In most cases the road to sound finances and preserving wealth is paved with common sense, not extraordinary risk and mountains of debt. Managing debt wisely, crafting a simple yet effective investment strategy that stresses the importance of diversification and low costs, and staying alert for the growing threats of identity theft and fraud are simple yet effective ways to help keep finances sound.

Managing Debt

Some people have a very low tolerance for debt. They pay their credit card bills in full every month, have fixed-rate mortgages with predictable monthly payments that they can comfortably afford, or even no mortgage at all, and would never think of taking out a car loan.

At the other end of the spectrum are those who use exotic, risky mortgages to buy houses they could otherwise not afford, borrow over five years to buy a high-end luxury car but do not have any savings, and make only the minimum monthly payments on five or six credit cards. Many people fall somewhere in between.

Of course, not all debt is bad, if used in moderation. Taking out loans to buy a house or fund a college education, for example, can be considered an investment in one’s future. But unless money is no object, whipping out credit cards for impulse or luxury items on a regular basis is an almost certain path to getting in over your head.

There is no magical point at which people suddenly realize they are sinking into debt. Given the liberal terms under which many lenders are willing to extend credit, compulsive borrowers who should be tightening their belts can instead go on multi-year buying sprees without much consequence. But eventually it catches up with them and by the time collection agencies start calling it is often too late to save a credit rating or avoid bankruptcy.

If you are unable to accumulate longer-term savings to achieve financial goals such as college funding or retirement, you are probably spending too much. Warning signs that you may be getting overextended include making only the minimum payment on a card each month, using one credit card to pay off another, “maxing out” more than one card, and using credit cards to pay for necessities such as groceries because you do not have cash available.

If you find you are having trouble paying your debts, it is imperative to develop a budget. Start by listing your income. Then, list your fixed monthly expenses, such as mortgage payments or rent, car payments, and insurance premiums. Next, list the expenses that vary, such as entertainment, recreation, and clothing. Write down all your expenses to track your spending patterns, identify necessary expenses, and prioritize the rest. Contact creditors to see if they would be willing to work out a modified payment plan. If you wait until they hand over your account to a collection agency, you may find this option unavailable.

If you are not disciplined enough to create a workable budget and stick to it, cannot work out a repayment plan with your creditors, or cannot keep track of mounting bills, consider contacting a credit counseling organization. Many credit counseling organizations are nonprofit and work with you to solve your financial problems. However, the Federal Trade Commission warns that even if an organization says it is “nonprofit,” there is no guarantee that its services are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high fees, which may be hidden, or urge consumers to make “voluntary” contributions that can cause more debt. Some nonprofit agencies are funded largely by credit issuers and their advice may be designed to benefit lenders rather than borrowers.

If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

Be very wary advertisements in newspapers or telephone directories that promise debt relief. This “relief” may actually be bankruptcy. Commonly used catch phrases include “Consolidate your bills into one monthly payment without borrowing,” “Use the protection and assistance provided by federal law,” and “Stop harassment, repossessions, and garnishments.”

Personal bankruptcy generally is considered the debt management option of last resort and should be avoided whenever possible. People who follow the bankruptcy rules receive a discharge, which is a court order that says they do not have to repay certain debts. However, bankruptcy information stays on your credit report for ten years, and can make it difficult to obtain credit, buy a home, get life insurance, or even get a job.

Also In This Issue:
Defending Against Financial Exploitation of the Elderly
Toward an Optimal Rebalancing Strategy
The High Yield Dow Investment Strategy
Recent Market Statistics 
Dow Jones Industrials Ranked By Yield
Asset Class Investment Vehicles

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