Young families often find themselves with large amounts of debt. College loans, car payments and the expenses of having small children can lead to financial struggles. Before you get further behind financially, sit down together and develop a financial plan you both agree on. Planning now can save you from further struggles and help plan for your future.
Amount of Debt
One of the most important aspects of beginning a financial plan is to assess your financial condition. Choose a time when the children are in bed and you can talk. Gather your bills and write down the name of each creditor, the monthly payment, balance owed and interest rate. Compare the amount of your monthly debt payments to your monthly income to calculate your debt-to-income ratio. Divide your monthly debt by your income. According to Smart Money, lenders are hesitant to approve loans if your debt ratio is over 40 percent. If your debt-to-income ratio is too high, you may be struggling to make ends meet.
Type of Debt
You may have different types of debt. Some are necessary, such as student loans and mortgages. Although better to pay cash, many young families have car loans due to the need for reliable transportation. Unnecessary debt includes balances on credit cards, loans for entertainment equipment, boats, vacations and expensive cars. The mountain of debt many families with children accumulate makes it easy to get into financial difficulty. Tamara Draut, author of "Strapped: Why America's 20- and 30-Somethings Can't Get Ahead," in an interview with BankRate.com says couples who have children are twice as likely to file for bankruptcy.
Benefits
When you plan for your financial future, you are able to save money for future needs, such as a down payment on a house. Even though your child is young, someday he will be ready for college. Having a solid financial plan will enable you to save for his college and your eventual retirement. Giving to charity, helping family members in need and feeling in control of your finances are other benefits to smart money management, explains Dave Ramsey in his book "The Total Money Makeover."
Strategies
To get out of debt and back on solid financial ground, meet with your employer's benefits specialist and analyze your tax deductions and benefits. Take advantage of tax-free benefits such as flexible spending and dependent care accounts, recommends ConsumerReports.org. Reduce your debt by selling items you do not need and cannot afford. Stop using, and then pay off, your credit cards, beginning with the smallest balance. Save a small amount of money every month, even if it is only $5.
Warnings
It is tempting to consider a debt consolidation loan. CNN Money advises against the loans due to high fees and interest rates. In addition to the costs, a debt consolidation loan only works if you have solved the reason for your financial problem. Until you are able to control your spending, a debt consolidation loan may worsen your financial position. If you hire a financial planner, ask friends and family members for recommendations.
References
- SmartMoney: The Six Mistakes Young Families Make
- "Strapped: Why America's 20-and 30-Somethings Can't Get Ahead"; Tamara Draut; 2007
- Bankrate.com: Life Stages of Debt
- "The Total Money Makeover: A Proven Plan for Financial Fitness"; Dave Ramsey; 2007
- ConsumerReports.org: 10 Big Money Savers for Parents
