Dear Debt Adviser,
Is it wise to get a personal loan of $17,000 to wipe out credit card debt? The cards have a maximum interest rate of 11.2 percent and my income is approximately $100,000 annually before taxes. I don't have a mortgage.
If you don't already have one, create a spending plan. Track all of your expenses including daily and out-of-pocket purchases, such as lattes or cigarettes. Here are some national budget percentages of net income to help you see where you may be going over the top.
National budget averages
Average percent of income spent in each category:
Housing (mortgage or rent, real estate taxes)
Utilities (water, power, garbage collection)
Medical and health care
Donations and gifts to charity
Savings and insurance
Transportation (car payments, gas, service)
Personal, debt payments, misc.
Consider these as guidelines and expect your own personal budget will vary, but if the difference is huge, ask yourself why and if you might be better off cutting back in some areas. For example, you may live in an area where rent is super expensive, so that category may be more like 35 percent of your net income. But if your housing costs are more than 50 percent of your net income, you may need to look into making some living changes, such as getting a roommate or moving to a less-expensive place -- likewise, if your transportation costs are 30 percent of your net income. Realize that if you don't do something to change things, you may have to cut back elsewhere.
The goal of a spending plan is to enable you to make conscious decisions about where your money is spent and in the process help you attain your financial and personal goals. Once you have a workable spending plan in place, the second thing I want you to do is include paying off your credit card debt over the next two years (approximately $790 per month) in the plan. Do this while also setting aside some money in an emergency savings account. You will likely need to make adjustments to one or more other categories in order to accomplish this, but a short-term sacrifice will be worth it in the end.