Savvy Consumer - Clintsman Financial Planning

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					Savvy Consumer: Scary truths about consumer debt
Terrified of debt? Here’s how to plan for the worst amid scary increases in costs of food, fuel and


It’s Hallow een, so here are few scary numbers for you. Since 2001:

■ Food prices have ris en 24 percent.

■ Fuel and utilities have gone up 48 percent.

■ Medical-care costs are up 35 percent.

■ Transportation costs are up 33 percent.

■ College tuition has risen 67 percent.

These numbers come from the Center for American Progress, a Washington think tank, based on data from the Bureau of Labor

Not surprisingly, w ith these increases in the basic cost of living, along w ith what can be categorized as poor spending habits by
Americans, we’re more in debt than ever.

The average American household has about $118,000 worth of debt, including mortgage, credit-card, auto and college loans,
according to Federal Reserve data published in the AARP Bulletin last month.

In many families, debt levels in relation to disposable income are way above what financial advis ers recommend for a healthy
budget, said Kevin Williams, a counselor w ith Money Management International in Fort Worth

"It’s absolutely frightening," Williams said. "A good number of people who call us have been losing their jobs. They’ve found work,
but it’s not paying what they previously made."

Many of Williams’ clients have already pulled all of the money out of their retirement savings to make ends meet, he said. When the
bills keep coming, they start calling credit counselors for help.

"The upcoming holidays are only adding to the stress," he said. "They wouldn’t be as bad off if it was February or March."

But budget busters such as holiday spending are what put many Americans into high debt in the first place, said Bryan Clintsman, a
certif ied financial planner in Southlake.

"We have been on a binge as consumers," he said. "Now it’s time to go on a diet."

But like most w ho are overweight, many are in denial and lack the discipline to fix their financial problems.

Clints man said a recent discussion with a client about overspending fell on deaf ears.

"He dropped his Lexus keys on my desk and said, 'I don’t know what you’re talking about," Clintsman said. "People used to be
remorseful about spending too much. Now they don’t even see it anymore."

Just like finding your body mass index to get a grip on your weight problem, there are tools and standards for your financial diet.
Here are some things to consider.
Write it down

"It’s only w hen you see it on paper when you realize what you’re spending," Clintsman said. Take one hour this week and look over
all your expenses. An easy and no-cost way to do this is to use the online tool This service w ill download all of your credit-
card bills, bank accounts and even 401(k), brokerage and mutual-fund accounts. It then will spit out your numbers in revealing
charts and graphs that tell in cold, hard numbers what you are spending by category for things like restaurants, clothes, gas oline,
etc. It also tracks how your investments are doing and advis es where to save in both areas.

Lim it your debt

“Keep total debt to no more than 35 percent of your gross monthly income. Under 30 percent is better, but more than 40 percent
should be considered a warning sign,” Clintsman said. “Remember, credit-card companies have the ability to raise your interest
rates at w ill if they consider your debt too high, which can start a downward spiral to your financial health.”

Good debt

Different types of debt will affect your financial health in good w ays and bad ways. Taking out a mortgage to buy a home is good
debt, because it is tied to an asset that will likely increase in value over time, Clintsman said. Even so, a good limit on house debt
should be 25 percent of gross income, he said. Realtors and mortgage brokers routinely advocate as high as 40 percent, but don’t
buy it, Clintsman advises.

In the same w ay, student loans could be considered good debt because schooling will ultimately raise your earning ability. But
student loans should be taken out w ith future earnings in mind, Clints man said. Attempt to keep the total loans to a level that would
not make payments more than 10 percent of your gross income upon repayment, he says. To help figure this, remember that you
will have to pay back about $12 per month for every $1,000 of debt (assuming an 8 percent interest rate over a 10-year period). To
reduce the amount you have to take out, consider a part-time job to help pay for school.

A car loan also might be a necessary evil for transportation to get you to work, but again the loan should be factored into that 35
percent total debt parameter. Another strategy would be to save for a used car to avoid the loan altogether.

Bad debt

Debt is considered bad when it buys something that loses value over time. "Expenses should never be paid with debt," Clintsman
said. Unsecured debt, like credit-card debt, should be 10 percent or less, Williams said. And using your credit card to buy that high-
definition TV for the holidays that you pay off over several years is not financially savvy because of the high interest costs. It doesn’t
cost anything to save first, then buy it w ith cash.

Live off half

Another way to look at debt is to look at what you make. Clints man said he routinely tells clients to live on half of their annual income
to be financially healthy. Here’s why: Start with your gross annual salary, take away 30 percent for federal taxes, Social Security and
Medicare; take aw ay 10 percent for what you should be giving and another 10 percent for what you should be saving. That leaves
50 percent remaining. "The mistake people make is that they base their budgets or spending plans on gross wages, not the net of
all these things," Clintsman said.

Measure wealth by the numbers, not the things

Create a net worth statement once a year. This is nothing more than a listing of assets and liabilities, w ith the difference being your
net worth.

A net worth statement is a much better indicator of your financial status and predictor of your future financial success than the siz e
of your house or car, or the amount of salary you make, Clintsman said.

"There is no better barometer of your financial condition than a net worth statement, because nothing can hide from it, and it
rewards you for putting your money into assets instead of expenses," he said.
Average American household debt

Mortgage debt: $84,911

Car and tuition loans: $14,414

Home-equity loans: $10,062

Credit-card debt: $8,565

Total: $117,952

Source: AARP Bulletin, based on Federal Reserve data


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