Adding up what you owe is the 1st step to managing debts

Collecting information for the annual income tax ritual may have raised your awareness about how much you owe others.

A study by the Federal Reserve Bank of New York late last year indicates we seriously underestimate what we owe. In fact, many of us owe 11/2 to two times more than we think we do.

While reviewing your financial situation, watch for red flags:

» Your total consumer debts add up to more than 20 percent of your take-home pay. That includes car payments, credit-card payments, personal loan payments and medical payment plans, but not mortgage payments.

Avoid applying for a new loan if the additional payment would make you exceed that 20 percent benchmark.

» Your home mortgage payment (including principal and interest plus homeowners insurance and property taxes) are more than one-quarter to one-third of your gross income.

» What you owe is more than your net worth (excluding the market value of your house and your first mortgage balance).

Credit-card debt mounts up easily. Many of us hold more than one credit card, and recent studies indicate about half of us don’t know the annual percentage rate charged for the card we use most often. Being aware of that can make you less likely to use it so lightly.

What else can you do to manage your debt from here?

» Stop adding to existing balances. If you pay off all of your monthly charges each billing cycle, enjoy the reward points or other benefits you may receive.

» Get a handle on living expenses. Identify a portion of your monthly budget for repaying credit cards and personal loans.

» Target a specific card or debt to repay quickly. Pay the minimum monthly payment on the remaining cards until this one is paid off.

» Keep it up. When you have paid off all of your consumer debt, begin working on your mortgage or begin a disciplined investment program.

For more debt-management strategies, see the Federal Trade Commission website at: www.ftc.gov.

Walter L. Koon Jr

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