You Asked, We Answered: Paying Off a Mountain of Bills, Budgeting Wisely and More

Financial planner David McPherson answered our viewers' questions.

Apr. 18, 2008— -- You submitted your questions about budgeting and financial planning to personal finance columnist David McPherson.

McPherson is founder and principal of Four Ponds Financial Planning ( in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Stacy from Kansas City, Mo., asked: "How do I budget on how to pay off credit cards. One card at a time? Help me from borrowing from my bank to pay off credit."

McPherson answered: Stacy, I would start by making sure you're current on all your credit card payments. Managing multiple credit cards with different payment dates can be quite tricky. Make sure you're making all your required payments on time. Otherwise, you'll get hit with severe penalties and possibly higher interest rates.

Second, take out the latest statement from each card on which you're carrying a balance and check the interest rate each one is charging. You want to focus on paying down the cards in reverse order of the interest rates. Pay down the one with the highest rate first, and then move on to the one with the next highest rate, and so on until you reach the lowest-rate card.

Say you have an extra $500 in a given month. Better to pay down the card with the 19-percent rate than the one charging 15 percent.

I also would suggest trying to automate your payments as much as possible with online banking. Schedule a payment to take place on pay day to ensure you're making progress. Even if it's just $10 a week, it's better to move forward with small steps than to constantly take big steps backward.

If you own a home, it may be worth considering a home equity loan as a means of consolidating your debt at a lower rate. But be careful. Don't just use it as a means to borrow more. Also, in the current environment, home equity loans are harder to obtain than they were a year ago.

Kathryn from Virginville, Pa., asked: "I'm a single mom making @ $57,000/yr. I make good money now but over the years without any child support I've gotten into credit card debt. Now I'm struggling to make ends meet and dig myself out of debt. On top of the already bad economy and rising costs of everything, my house needs major repairs. Is there a way to take my good salary and get myself out of debt without filing bankruptcy?"

McPherson answered: Kathryn, the best way to dig out of debt is one shovelful at a time. It may seem daunting, but if you make just a little bit of progress, it will make you feel better about the situation and motivate you to do more.

One suggestion for you and others struggling financially is to scrutinize any recurring monthly bills you pay either by credit card or by automatic debit from your checking account. Bills for cell phones, cable television, Internet service and newspaper subscriptions have a way of living on beyond their necessary lives.

Revisit every monthly cost and decide whether you really need that service or product. Companies want you to set up these recurring payments because they know inertia takes over and you're likely to continue the payment well beyond your need for their product or service.

A second suggestion, Kathryn, is to automate your debt payments at a somewhat higher rate than you pay now. If you currently pay $50 a month toward a credit card balance, set up a monthly $60 payment via online banking and see how that works out.

Tina from Grosse Ile, Mich., asked: "WE NEED HELP WITH A BUDGET FORMAT TO FOLLOW"

McPherson answered: Tina, check out the personal finance calculators available at In particular, look for the home budget analyzer listed on the home page. It will help you figure out where you're money is going and identify possible areas for improvement.

Sarah from Dakota Dunes, S.C., asked: "Travis and I are a young couple. We just bought our first house with good rates and lots to choose from we got exactly what we wanted...maybe more than we bargained for. We are starting to feel the pinch of more bills...more expensive bills, and the need to buy things for the house. Where does it all go and how are we left with nothing in the end?!? On paper it works out...but in doesn't. Where did we go wrong? How can we get back on track?"

McPherson answered: Sarah, most first-time homebuyers, me included, underestimate the costs of home ownership. They focus more on their mortgage payment and compare that to what they're paying in rent. Even if you did factor in the costs of property taxes and homeowners' insurance, it's easy to overlook basic maintenance costs -- never mind upgrades and furnishings.

To get back on track, I would consider setting up a separate savings account to hold money for household needs such as repairs, maintenance, upgrades and maybe even a small household luxury or two. Use direct deposit or online banking to direct a certain amount of money each payday into that account.

While you build up the account balance, you may need to forgo new furniture and other nonessentials. Thirteen years after my home purchase, I'm still waiting for new bedroom furniture.

Just make sure you're covering the mortgage, insurance and taxes. You don't want to fall behind in those areas.

Nora from Ponca City, Okla., asked: "Why do banks have such low interest rates on savings accounts while credit cards are allowed to charge such high rates?"

McPherson answered: Nora, the short answer is banks are in business to make money. Much of their profit stems from the difference between the interest they must pay to depositors and what they collect from borrowers, including credit card holders.

It's to their benefit to pay as little as necessary to depositors and charge credit card holders the highest rates possible within the law's limits. For banks, credit cards are a high-risk, high-reward line of business. The risk of default by the borrower is quite high, but the tradeoff is the higher interest rates they can charge.

The best thing I can suggest is to play this game to your advantage by shopping around. Thanks to online banking, there's no reason for you to settle for a savings account paying you less than 1 percent. And if you have good credit, chances are you'll be able to find a credit card issuer willing to charge you a lower rate than you have now.

Monica from Frankenmuth, Mich., asked: "I would love advice on buying a home. We lived in Ohio and my husband lost his $60/year job and when he finally found another one, we had to move out of state and he now only makes $40/year. We are renting now and need to know if we should keep renting or try to buy a home. We have one in mind and have made a very low offer but it was rejected, the house is now on the auction block and no bids yet. We will not bid on it b/c we have no reserves to fix if something is significantly wrong with it. I feel like we have gone from the proverbial frying pan into the fire by moving from Ohio to Michigan where the economy is just as bad if not worse. We are struggling with finances. I work only part-time at my children's school and make $7.52/hr. This barely helps fill the gas tank. We really need some sound advice. Worst of all we have had to let our life insurance policies lapse due to us not being able to pay the premiums. I am really afraid for my children now. Please help."

McPherson answered: Monica, it sounds to me like you're leaning in the right direction by focusing on the need for a reserve fund. I would hold off on the home purchase until you accumulate funds for a healthy down payment and other home ownership costs. You want to avoid the type of situation in which Sarah and Travis, mentioned above, find themselves.

As you try to build up that reserve, keep an eye on the local real estate market and mortgage rates. Also, learn as much as possible about the financial aspects of buying a home. Knowledge can keep you from making an expensive mistake.

Given I'm based in Massachusetts, I know nothing about the Michigan real estate market, but I think time is on your side in terms of price trends. Even if prices begin to inch upward, you'll be in much better shape the larger your reserves.

Let me also suggest you revisit the issue of life insurance. It's critical for your family's financial security. Term life insurance is relatively cheap. I'd suggest you do some online shopping for term insurance. I think you'll find it's more affordable than you realize. You can save money on premiums by opting for a shorter term, say 10 or 15 years rather than 20 years. Some coverage is better than none. Think about it.

Randy from Moreno Valley, Calif., asked: Hi, we have a difficult and confusing situation. My wife and I are both teachers. She has taught for 24 years(breadwinner) and I changed careers having had a successful business for 17 years. My career change added on to our debt as well as the lower teacher's salary. We do very well putting money away for retirement and are making our first/second mortgage fine. Now to the problem: I have 3 school age daughters who are doing very well in dance. This is their sport and we know how important it is for them to be active. The problem is that it is causing us to rack up even more bills--most credit cards. We have an embarrassingly high credit card debt and it continues to climb. Do we need to axe the dance(the kids already blame my career change for the money woes.) or do we cut back on retirement contributions in the hope of paying more towards credit cards. I am afraid cutting back on retirement contributions will just force us to pay more in income taxes. We just seem to be going in circles. Some months we seem to make no more than minimums on credit cards and so far we have been able to keep the rates on the cards fairly low but the debt is climbing!"

McPherson answered: Randy, first, make sure you're staying current on all credit card payments. The worst thing that can happen is to get hit with penalties and higher interest rates. That just digs a deeper hole.

The most important thing is to stabilize the situation and then try to deal with the debt.

Without knowing your ages or how much you have set aside for retirement, I can't say whether it would be wise to scale back your retirement contributions. If you started saving early and have a healthy nest egg for your age, you might be able to trim what you're contributing. But if you're behind for your age, it may not be the right move. You might want to try out the retirement savings calculator available in the personal finance section of www. It can help you determine if you're near where you should be for your age.

Also, be sure you're contributing enough to capture the full amount of any matching contributions made by your employers.

Whatever route you do go, it sounds like a family conversation is needed. If dance is that important to your girls, then maybe they need to make sacrifices in other areas such as clothes or other activities. For most families, it's question of setting financial priorities. What's most important to the family as a whole?

And remember, your career happiness should be a top priority as well.

Susan from Mountain View, Calif., asked: "My husband and I each have a small entertainment business and I have 3 part-time teaching jobs. Our housing costs alone (rents for home and biz over $2.5K/month) and other living costs have caused us to live above our means to the tune of over $10K in credit card debt, not including car loan and fixed expenses. We paid over $10K just in premiums to our Health Insurance provider last year. We have had this amt. of debt for a few years now despite paying as much of it as we can. It WAS up to $15K a few months ago. We don't take lavish vacations or go to cultural events or really even movies out. Seems like we both just work and don't take time out to enjoy! How long will it take us to get out of debt at this rate? We would love to buy a house of our own but I don't know how we can afford to in this Silicon Valley. By the way, we are an artist/teacher and a musician/teacher, not high paid tech workers. We have no children, no disability insurance and no life insurance, but I have just purchased long-term care insurance for myself. Any advice?"

McPherson answered: It's tough to address every issue you raise, but here are a couple thoughts. First, it sounds like you're renting both a home and a business location. Any chance of doing both in one location? If not in your current home, is it worth finding a new place to live from which you can also operate your business.

Second, I'd suggest that as a business owner you look to ensure you are maximizing your income opportunities. I don't know anything about your business, but that may be your best route to a higher income.

On the health insurance issue, I'd suggest you look into maybe setting up an HAS, or health savings account. They're not for everyone, but for small business owners already paying for their own insurance, they can be a smart option.

Finally, I'd revisit the issue of the long-term care insurance. I don't know your age or health status, but generally for working age people, disability insurance is more important. In the next five years, do you face a greater chance of incurring a disability that keeps you from working or needing long-term care assistance?

I'm not suggesting you drop the long-term coverage, but rather study it closely and consider which is more critical at this time.