How to survive 7
big budget busters
Financial stress doesn't
result just from credit cards. Truly serious problems arise because
you don't plan properly for the most important, fixed costs in your
By Liz Pulliam Weston
Most budget advice focuses
on carving savings out of your discretionary spending -- how much
you blow on lattes or health clubs or eating out.
But interviews with credit
counselors and bankruptcy attorneys show it's more often the expenses
you consider fixed or beyond your control that can cause you serious
These budget-busters can
transform a household that's getting by into one that's insolvent
and hounded by creditors. Here are the seven big offenders, and
what you can do about them:
Too much house
Soaring real estate prices,
looser lending standards and smaller down payments mean many families
are shouldering bigger and bigger mortgages -- sometimes to their
peril. Foreclosures and delinquencies are at or near record highs
as many people fail to make their monthly payments.
It's not just the mega-mortgage
that knocks people off track, said Steve Rhode, president of money
counseling firm MyVesta.com. More expensive houses come with:
- Higher property taxes
- Larger insurance premiums
- Bigger utility bills
- More maintenance costs
Yet many people continue
to struggle to keep a too-expensive house when a smarter solution
might be to sell it and downsize, Rhode said.
Ideally, your basic housing
expenses -- mortgage, insurance and taxes -- would eat up no more
than 25% of your pretax income. Most lenders will allow you to spend
31% to 33%, although some now go as high as 60%. The bigger the
mortgage bite, the more likely you are to run into trouble.
Too many kids
If money were the only consideration
in whether to have children, few people would take the plunge. Fortunately,
that's not the case. But you do have to change how you budget your
money when you have a child, or you can easily run aground.
In fact, bankruptcy expert
Elizabeth Warren says married couples with children are more than
twice as likely to file for bankruptcy as their childless counterparts.
The Harvard law professor says having a child is now the single
biggest predictor that a woman will end up in financial collapse.
It's not just the little
things, like car seats and soccer uniforms. You may need a bigger
car to shuttle around those car seats, and a bigger house, with
a yard, to raise those soccer fans. Insurance, food, clothing, medical
costs -- all go up with a child.
"A child is definitely
a capital expenditure that doesn't go away," said Dianne Wilkman,
president of Springboard Consumer Credit Management.
How much a child increases
your expenses typically depends on your income. The U.S. Department
of Agriculture estimates a child born in 2002 will cost the following
amounts to raise to age 18:
- $127,080 for two-parent families with incomes under $39,700
- $173,880 for similar families with income of $39,700 to $66,900
- $254,400 for families with incomes over $66,900
These amounts, which are
in 2002 dollars, don't include paying for four years of college,
which would add $40,000 to $120,000 to the tab.
Advocates of frugal living
will say you can raise kids on a lot less. Families living in expensive
cities and opting for private schools or childcare will tell you
it also can cost a lot more.
In fact, a family living
in urban California or New York with a six-figure income can spend
$1 million raising and educating a child.
You can use calculators like
the one at Babycenter.com to estimate how much you're likely to
spend on your child. Or you can just figure on spending an extra
$10,000 a year or so per child. (See link at left under Related
Either way, you need to make
room in your budget for your wee ones. It may mean fewer vacations
or dinners out, but you can't spend the way you did when you were
childless unless you make a lot more money. Frugal living books
such as Amy Dacyczyn's "Tightwad Gazette" series and Web
sites such as The Dollar Stretcher offer tips for living cheaper
with children. (See link at left under Related Web sites.)
Too much tuition
This, of course, is Child-Rearing,
Part Two. And the costs of education begin well before kindergarten:
- Buying the right house. If you opt for public
school, you'll probably want a decent school district, and that
usually means paying more for your home. Houses in good districts
sell at a premium in most markets.
- Paying for preschool. Educators say preschool
boosts chances for later school success, and two out of three
kids now attend. But preschool is rarely publicly funded and may
cost several hundred dollars a month.
- Opting for private school. For religious, personal
or academic reasons, you may prefer private elementary or secondary
school education. Tuition can cost $10,000 or more for elementary
grades and go up from there. Then there's college.
Parents naturally want
the best for their children and often resist the idea of scaling
back, Rhode said, even when it's clear they can't afford the options
they've chosen. If you're borrowing to pay pre-college education
expenses, you're spending too much. If it will take you more than
10 years to pay off college loans, you may need to consider less
expensive options: a public university instead of a private one,
or a couple years of community college before transferring to a
Too much car
About 40% of the buyers of
new cars owe more on their current vehicle than the car is worth.
Add this to today's longer loan terms -- 80% of car loans are for
more than four years -- and you have millions of people taking big
risks on their vehicles.
If they lose a job or otherwise
can't make payments, they can't simply sell the car and downsize
to a smaller vehicle. They'll still owe money on their loans that
has to be paid off somehow, and they don't have any equity to get
into another car.
The best cure for this situation
Don't trade in a car until
you've paid it off.
- Don't buy a car you can't pay off in four or five years.
- Consider driving each car for seven to 10 years.
Not enough marital
In the mid-1980s, a much-publicized
study proclaimed women's standard of living dropped 73% on average
after divorce while their ex-husband's rose by 43%. Those jaw-dropping
figures were quickly proved to be based on some miscalculations
and corrected to 27% and 10% respectively.
Many families, however, find
both exes have trouble getting by when the same income must now
make two rent or mortgage payments. Missouri bankruptcy attorney
Gary Barnes sees many households who were on the financial edge
during marriage get sent over the brink by divorce.
"They just can't support
two households," he said.
Even if one spouse is able
to get by, he or she can be brought down by the financial troubles
of the other one. If joint accounts aren't closed and mortgages
refinanced, the bankruptcy of one ex can show up on the credit report
of the other -- which means higher interest rates and more trouble
Obviously, no one would advocate
staying in an abusive marriage. But an investment in counseling
could prevent a costly breakup for some couples. If divorce is inevitable,
you can contain the damage by closing joint accounts.
Not enough health
One out of seven Americans
has no health insurance at all -- no private coverage, no Medicare,
nothing. An accident or illness can be disastrous.
In fact, medical bills contribute
to one out of five bankruptcies, according to studies by credit
card behemoth VISA and by SMR Research, a business research firm
that specializes in the consumer lending industry.
Health insurance itself is
expensive, which is why so many people forgo it. A smarter choice
might be to opt for high-deductible policies, which require paying
the first $1,000 to $5,000 out of pocket but which protect you against
catastrophic medical bills.
Not enough emergency
More than 40% of American
households have less than $1,000 in liquid, non-retirement savings
accounts, according to an SMR Research study of Census Bureau data.
families are incredibly vulnerable to financial setbacks, credit
counselors and bankruptcy attorneys say. A lost job, a car breakdown
or any unexpectedly large bill can quickly become a financial crisis.
Many of these households use their credit cards as a substitute
for an emergency fund, but that works only until they've maxed out
their cards or fallen behind on their payments. Then their card
issuers jack up their interest rates and assess penalties, making
the balances even harder to pay off. Some even lower credit limits,
increasing the odds that customers will rack up over-limit fees.
These days, it only takes
one late payment or maxed out card to wind up with higher interest
rates on all your cards. That's because issuers scan their customers'
credit reports, looking for evidence of financial trouble. A high
balance or delinquency on one card is enough to induce the other
credit card issuers to boost their rates.
A better solution is to start
building an emergency fund now. Set up an automatic transfer so
some of your paycheck winds up in a savings or money market account.
Deposit any windfalls or tax refund checks until the balance is
over $1,000. Once you've paid off any credit card debt, continue
building your emergency fund until you have three to six months'
worth of expenses saved. It can mean the difference between surviving
a financial disaster and going under.