How to consolidate your personal debt to rein in finances Featured

8:01pm EDT December 31, 2012
How to consolidate your personal debt to rein in finances

Some people are in denial about their personal finances, thinking that they’ll get to it one of these days.

“You need to have a lot of discipline around your finances because getting into financial shape is tough,” says Jeanine Fallon, Senior Vice President and Market Executive, First Commonwealth Bank®. “It requires focus, planning and a lot of sweat, but the end result is a happier and more fulfilled life.”

Smart Business spoke with Fallon about taking control of your debt and spending habits.

How should you assess your debt situation? 

Look at your current obligations by gathering monthly statements and listing loans and debt. Think about the creditor and your balances, interest rates and payments. Total all payments and divide your gross income by the debt to find your debt to income ratio. The target should be around 36 percent, but those with high disposable income can go a few percent higher. Then, use your partnership with a lender you trust to create a solid financial plan.

It’s also helpful to pull your credit report three times per year from annualcreditreport.com because not all credit reports are free.

What are some warning signs your finances are heading out of control?

Some warning signs are if you have no emergency fund, typically three to six months of your income, to fall back on; you experience stress when thinking about your debt; you don’t know what you owe; and/or you continually charge more on your credit cards than you can pay back.

How can a debt consolidation loan help?

Consolidation loans don’t reduce your debt but can reduce your payments. You take your debt and consolidate it into one big loan to simplify your payment and tracking. Your banker will help you decide on a secured loan or an unsecured loan, the right term to quickly pay off your debt without creating hardship, and choosing between a term loan or line of credit. Keep the end number in mind, which is what you’re paying back with principal and interest.

What are some best practices to help stay debt free?

Even if you consolidate your debt, it’s important to take steps to ensure you don’t end up right back in the same financial bind you were in before. Manage your expenses by establishing a budget. Keep a spending diary of every penny you spend for at least a month — similar to a food diary when on a diet. When looking at your funds, break it into percentages:

• Foundation expenses, such as shelter, groceries and transportation, should be 45 percent of your take-home income.

• Include 15 percent for fun, vacation, dinner, clothes or whatever your passion is.

• Typically at least 25 percent is used for taxes.

• Keep about 15 percent for savings — 10 percent for retirement and 5 percent for emergency or big-ticket items.

Then, manage, reduce and eliminate debt. It is important to make wise decisions when assuming new debt by using good debt to improve your net worth. Tie savings and spending plans with what’s important to helping you to live with a purpose. For example, if vacation time away with your extended family is important to you, yet you own a huge, expensive house, your financial obligations may not be in line with your values. Also, prepare for life events by taking a disciplined approach to building up the money you put into your retirement plan as well as your emergency fund. Ultimately, if you don’t change the way that you’re spending money when you experience significant life changes, it can cause hardship in the end.

Jeanine Fallon is a senior vice president and market executive at First Commonwealth Bank. Reach her at (412) 886-2540 or JFallon@fcbanking.com.

For a debt consolidation calculator, visit http://www.fcbanking.com/planning/calculators.html?CALCULATORID=PC10&TEMPLATE_ID=www.fcbanking.com_1.

Insights Wealth Management is brought to you by First Commonwealth Bank