By Mark Foster

It’s more fun racking up debt than it is paying it back. But, to have some measure of financial freedom in your life you need to focus on destroying your debt.

 The 2012 NFCC Financial Literacy Survey showed that 39% of adults carry card credit card debt over from month-to-month. Don’t be content with merely paying the minimum due on your credit card debt, or else it could take you decades to pay that debt off and cost you thousands of dollars in interest.

One of the best things you can do to prepare for your retirement is to destroy your debt. The average monthly Social Security check is just $1,230. Imagine trying to live on that amount! About 15% of retired Americans do. Imagine how much easier it would be for you as a retiree to live on Social Security if you had no loan payments or no credit card debt to worry about. And  just over a third (34%) of retirees get 90% or more of their retirement income from Social Security. It’s important to save for your retirement, but that’s another story. Having no debt when you retire will be a tremendous help to you to financially survive.

Avoid getting any new credit when you’re focusing on knocking down debt. It’s hard to put out a fire if you’re pouring gas on it. If you are an impulsive spender, you ought to leave your credit cards at home instead of carrying them around with you everywhere you go. And if you are struggling with debt, you might consider plastic surgery and cut up your credit cards.

Before you make a large purchase, ask yourself, “How many hours did I have to work to buy this item?” or, “will I have to work” if you’re buying it on credit. Knowing that you’d be trading 25 hours of work to buy, for example, a digital camera will help you avoid overspending. You might decide to buy a lesser expensive camera, or to postpone your purchase until later. Reviewing your potential purchases like this can help you to build up savings and destroy your debt.

If you’d like a lower interest rate on your credit card, call and ask your card company. Sometimes companies will lower a card member’s interest rate simply because they’re asked. It’s a free call, so it doesn’t hurt to ask. The company is more likely to lower your interest rate if you have good credit and have a good history of making on-time payments.

Whenever you receive extra money – from a tax refund, raise, or whatever – be sure to have a plan for that money. All too often people treat extra money as though they had won the lottery and carelessly spend most of it. Plan ahead to have some fun with your money, but that the majority of the money will be used to build up your savings and knock down some debt faster.

When you pay extra to destroy your debt faster there are various ways to do it. However, the debt with the highest interest rate is the one costing you the most money in interest so knocking it down first makes sense. Some people choose to destroy the smallest debt first to taste debt-busting success sooner. That approach won’t save you quite as much money in interest, but it can be a very successful approach if it helps you stay motivated to knock out your debts, and when you pay off a debt you roll that payment up into the next debt for faster payoff.

If you need more help in destroying your debt, a Debt Management Program from an NFCC Member Agency such as Credit Counseling of Arkansas can help lower your interest rates, and lower your monthly payments to destroy debt faster. Remember the saying, “If you aim at nothing, you’ll probably hit it.” Destroying your debt is an excellent goal to have.

Mark Foster is Director of Education with Credit Counseling of Arkansas (CCOA). CCOA is a member of the National Foundation for Credit Counseling. Visit CCOA online at www.CCOAcares.com

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

By Morgan Gee

As a working professional and parent, having to choose to return to the workforce after the birth of your child is, to me, an unfair and cruel choice to make. Ask any parent who stayed at home for a mere six weeks to bond with their bundle of joy only to have to turn him or her over to someone else for eight hours a day and sometimes more. It’s excruciating.  For the majority of us, gone are the days where the household is sustainable by one paycheck; it takes two to support a family. Emotionally I contemplated not coming back to work. Logically I had a lot more factors to consider. It is the emotional that propels many of us to stay at home. That is not necessarily a wrong decision. However with this new responsibility of being a parent, you cannot always think with your heart.                                                                                          

So I pose this question to all parents who are in or will soon find yourselves to be in the same situation. As parents, with all of our other responsibilities, do we not also have an obligation to provide a stable financial environment for our children, and if need be, return to the workforce as a way to provide that stability?

I remember being stopped by a colleague in the parking lot shortly after I returned from my three-month maternity leave and I began sobbing. I was saying that I didn’t know how I was going to do this, meaning going back to work; I missed my son so much. Her answer to my emotional breakdown? Peanut butter and macaroni and cheese. Yes, she told me that if I cut back my expenses and lived on mac and peanut butter then I could afford to stay at home with my son.

I am a certified credit counselor. Did it not occur to her that I work budgets for a living? Did she think it was as simple as that?

Recently another colleague and I were talking about daycare arrangements. She is expecting her first child this spring. Her words were, “I simply can’t fathom paying someone else to raise my baby; no offense to what you chose to do, Morgan”.

I strongly believe that everyone at some point in one’s life, everyone needs to be a credit counselor. They need to take a big drink of reality and see what I see on a daily basis. They need to see the clients who have stopped working after the baby is born, but have not stopped spending accordingly. They also need to see the emotional toll that financial strain can take on a family. They need to sit with the client who is crying and not sleeping at night because they are constantly worried about bills. They are arguing with their spouse constantly about stress and money; that stress affects all of your relationships and often is a recipe for a family upheaval. 

And because the paycheck stops doesn’t mean life stops happening. Appliances will break, cars will need repair, people will need medical attention, and new clothes and savings accounts will have to be dipped into. They will not be replenished as quickly, if at all, however as they once were. You will still want to take vacations (I know how to research free museum days and have a “staycation” to have fun on the cheap but there are still expenses there), and there will still be holidays and birthdays to buy for and celebrate. If I did not go back to work and chose not to put the above examples on credit cards, am I depriving my child of a certain quality of life? What if money was so tight we couldn’t go out for pizza or to a movie?

On occasion to accommodate one parent staying home, the other will either pick up more hours at work or take on an additional job. However then you never see your spouse, your child never sees his mother or father, and your marriage is at risk of disintegrating.

Logically, we had to think in the long term and not in the immediate emotional term what was going to be best us. That is where parents have a very hard decision to make; you make an emotional sacrifice to provide financial wellness for your family.  If you do choose to return to work there will be days when you will feel vulnerable and guilty for the choice you have made and you may question yourself.  The irony of this is that your choice makes you an incredibly selfless and strong parent for putting your family’s needs before your own emotions.

So I did not choose to go back to work, and I did not choose to put my child in daycare. To me there was no choice. I choose to work so I can save money out of every paycheck for my family’s emergency fund, and my son’s savings account. I choose to work because my employer provides a decent health insurance plan that my son will depend on. I choose to work because doing so enables my husband and son and I to do things and go places as a family. I choose to work because I am playing a major role in contributing to the financial stability my son so deserves.

Morgan Gee is a Certified Credit Counselor with Chestnut Credit Counseling Services. Chestnut Credit Counseling Services is a member of the National Foundation for Credit Counseling.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

By Gary Silverman

Cash flow has two components: what goes-in and what goes-out. You might know them as income and expenses.

Income is any money that flows your way. This might be money you earn through a job or a hobby. It might be from your investments in the form of income or dividends.

An expense is the money that leaves you. It might leave you before you even see it such as through tax withholding. It could be money that turns into tickets to Disney World or a movie. Mostly it’s the mundane: your rent, electricity, groceries, and gas.

Related to cash flow is net worth. Net worth is the summation of everything you have (assets) and everything you owe (liabilities). I won’t go into this in great detail right now, except to mention the concept of delaying cash flow.

Let’s say that you got a Christmas bonus (a rare thing these days). Instead of spending it, you decided to save it for a future kitchen remodeling. In a way, you are delaying the flow of cash through your system. The money came in, but it hasn’t yet gone out. This type of saving is called an asset.

On the other side of the equation, you might have an expense with no income or savings to support it. Let’s say that you buy a car that costs $25,000. You don’t have savings for the car so you go out and obtain a loan. In this case, you’ve spent money that you didn’t have. The loan becomes a liability; the car is an asset. You have again delayed the cash flow. But it is only delayed; eventually you’ll have to flow cash out to pay off the loan.

Most people haven’t a clue what their cash flow is. If this is you, take some time to determine yours.  First, make a list of all the income you anticipate coming in the next year. We want to look at gross income; that’s the income before any expenses come out. So look at your paycheck, social security check, or other earnings, prior to the deduction of  things like taxes, health insurance, and other expenses.

Now, list all of your expenses. Taxes will be a big category. The monthly expenses will be easy to determine, the annual ones will be a bit more difficult, and the less than annual will be hard to get a good grasp on. Nevertheless, do your best. Don’t forget vacations, car repairs, and the like. Estimates are fine for now; you’ll have plenty of time to adjust as time goes on. Though not a true expense, go ahead and make a category for any money you have going into savings or investing.

Here’s the test. Compare your income to your expenses. They should be pretty close to equal. After all, all the money that you made is going somewhere. If it is not being spent then it’s being saved or invested. If you’re having a really hard time doing the current year, then try looking back at last year to see where all your money went.

Keep working on your income and expense list until they come within about five percent of each other. When you’ve completed this exercise, you will understand your own personal cash flow.

Gary Silverman holds the Certified Financial Planner (CFP®) license and is a member of the Financial Planning Association (FPA®). Gary is the founder of Personal Money Planning, a retirement planning and investment advisory firm, and is a Qualified Kingdom Advisor.

Find out more about Personal Money Planning at the company website or follow on Facebook.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

By Gail Cunningham

In recognition of Financial Literacy Month, the NFCC and the Network Branded Prepaid Card Association (NBPCA) released the results of the 2012 Financial Literacy Survey. In its sixth year, the survey annually provides data and trending around Americans’ attitudes and behaviors related to personal finance.

The 2012 survey revealed a disturbing lack of basic financial skills that are critical to building a stable financial future.  Consider the following results in areas such as budgeting, saving, responsible bill-paying, and money management: 

• More than half of U.S. adults, 56%, admit that they do not have a budget;
• One-third of U.S. adults, or more than 77 million Americans, do not pay all of their bills on time;
• 39% of adults carry credit card debt over from month-to-month;
• Two in five adults indicated that they are now saving less than they were one year ago, and 39% do not have any non-retirement savings; and,
• 25% of those who do not currently have non-retirement savings indicated that, if they did begin to save, they would keep their savings at home in cash. 

“This year’s survey unveiled some disturbing trends, showing that a significant number of Americans are saving less, spending more, and carrying credit card debt over from month-to-month, suggesting that the painful financial lessons of the past are quickly being forgotten,” said Susan C. Keating, president and CEO of the NFCC.  “Coupled with the two in five adults who gave themselves a C, D, or F on their knowledge of personal finance, the need for an increase in financial education becomes not only clear, but urgent.”

For the first time, the 2012 survey evaluated consumer responses related specifically to prepaid debit cards and discovered the following:  

• More than one in ten adults (13%), or about 30.5 million Americans, typically use prepaid debit cards to pay for everyday transactions such as groceries, gas, dining out, paying bills, and shopping online.
• 78% of adults who use prepaid debit cards for everyday transactions say they use them because they are convenient;
• 73% use prepaid cards because they feel the cards are safer than carrying cash;
• 72% utilize prepaid cards because it allows them not to overspend or spend money they don’t have; and,
• 56% find that the cards enable them to better manage their money.

“Consumers feel empowered using prepaid debit cards and revealed in the NFCC/NBPCA survey that the top three reasons for using the cards were their convenience, safety, and ability to control spending. Additionally, about three in four prepaid debit card users indicated they believed prepaid cards are a better value for their money compared to a credit card or debit card connected to a traditional bank account,” said Kirsten Trusko, president and Executive Director of NBPCA.

Methodology

The 2012 Financial Literacy survey was conducted by telephone within the United States by Harris Interactive on behalf of the NFCC and NBPCA between March 16 and March 19, 2012 among 1,007 adults ages 18+, of whom, 89 use prepaid debit cards for everyday transactions. Results were weighted for age, sex, geographic region, and race where necessary to align them with their actual proportions in the population. The full survey is now available in the Newsroom section on the NFCC website at www.NFCC.org.

Gail Cunningham is Vice President of Membership & Public Relations with the NFCC.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

By Jason Alderman

I’m a firm believer that the more knowledge you acquire, whether through college, trade school or self-study, the richer your life will be. But as college tuition and fees continue to skyrocket, students and parents increasingly are asking, “Is a degree really worth the cost?”

For many people it certainly is: On average, college graduates earn roughly $550,000 more than high school grads over a lifetime, according to a Pew Research Center study – even after factoring in the costs and lost earnings associated with attending college. Not only that, the unemployment rate among college grads is only half that of high school grads – 4.2% vs. 8.4% – according to recent Bureau of Labor Statistics figures.

So, assuming your kid is interested in college, a good follow-up question might be, “How much can we afford to spend on higher education without digging ourselves into a hole?” Unless you started socking away money long ago, or Junior can count on a full-ride scholarship, you’ll probably need to take out student (and parent) loans to pay for that degree.

Just be sure to tread carefully so you’re not saddled with too much debt. Here are a few factors to remember: 

Not all degrees are created equal. The average college graduate now carries roughly $25,000 in student loan debt, but many families rack up far more, especially if they have several children. Students should follow their passions – in education and in life – but remember, someone with a degree in engineering or computer sciences will probably garner much higher pay and more easily be able to pay off loans than graduates in lower-paying fields like education, social work, or the arts.

In other words, don’t take on debt that will overwhelm your future ability to pay it off. To save money, many students start out at a community college then transfer to a four-year institution. Just keep in mind that thanks to budget cutbacks and increased enrollment, it may take longer than two years to complete lower-division coursework at a J.C. 

Calculate college’s true cost. As with buying a car, when tallying a college’s true cost there’s the sticker price – the stated full cost for tuition, fees, room and board, etc. – and there’s the net cost you’ll actually pay after subtracting various grants, aid, work study, Expected Family Contribution (EFC) and other financial adjustments that may apply.

Each college uses its own calculation method, so traditionally it’s been difficult to compare one school’s net cost with another’s. But thanks to a new federal law that kicked in October 2011, all post-secondary institutions must post a “net price” calculator on their websites to help families more accurately estimate the true costs of attending, based on the student’s individual situation.

Colleges may either use the Department of Education’s basic calculator template or develop their own if they wish to ask for more detailed personal information. Calculations typically take only a few minutes to complete.

Although you won’t be able to do exact comparisons between institutions, the new calculators do provide a good starting point for estimating the true costs of various colleges. Indeed, some students find that because of financial incentives offered, such as grants, merit-based scholarships and low-income subsidies, they can actually afford schools they’d previously ruled out. In some cases, expensive private schools end up being cheaper than comparable state schools.

Another good comparison tool is the Department of Education’s College Navigator, which lets you search for details about colleges throughout the U.S. – everything from tuition and housing costs, to majors and degrees offered, to typical SAT scores of students attending. You can even build a list of schools you’re interested in for side-by-side comparisons.

Fill out an FAFSA. Even if you think your income is too high to qualify for financial aid – having several children enrolled at once may prove you wrong – you still should fill out the Free Application for Federal Student Aid (FAFSA) form, since it’s also required by virtually all colleges, universities and career schools for access to federal student loans. Federal loans generally have more favorable interest rates and repayment terms than private loans so it’s best to exhaust your alternatives there first.

Get an FAFSA from your school guidance counselor or financial aid office, at the Federal Student Aid website, or by calling 1-800-4-FED-AID. Even though the FAFSA filing deadline for federal loans for the 2011-2012 school year isn’t until June 30, 2012, many state and individual school deadlines occur months earlier. Plus, you may be required to complete additional forms. (Find your state’s deadline HERE.)

Repayment options. If you’re having difficulty paying off student loans and want to avoid defaulting, there are a number of repayment options available, including Income-Based Repayment (IBR), under which required monthly payments of federally insured loans are capped at an affordable level relative to your adjusted gross income, family size and state of residence. To learn more, visit this Department of Education site and the Project on Student Debt.

If you expect your financial hardship to be temporary, other loan repayment options, such as economic hardship deferment, forbearance and extended repayment, may be better options. For details, read FinAid.org’s Solutions for Borrowers Who are Having Trouble Repaying Education Loans.

To learn more about student loans, read my previous blogs, Start Your Student Loan Search Now, and Easing Student Loan Repayments.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It’s always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to Practical Money Skills for Life.

Jason Alderman is Senior Director, Global Financial Education, with Visa, Inc.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

By Gail Cunningham

Gail Cunningham is Vice President of Membership & Public Relations with the NFCC.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

By Erica Sandberg

Dear Erica,

I wanted to know what I can do to obtain a real credit card. My credit rating really stinks, and it’s embarrassing. It’s in the low 400s, and I don’t qualify for anything. To make matters worse I’m receiving unemployment, but actively seeking employment. What can I do? I cannot at this point pay any of my past debts, so I’m really stuck. I know I got myself in this mess and want to take responsibility for it. Thanks for your time and help.

— Michael
Hi Michael,

I’m not going to gloss over this — your credit does smell pretty bad. A FICO score in the low 400s is barely above the 300 start point. That could mean one of two things: You have not yet become a responsible and adroit borrower, or you have borrowed money but failed to pay it back as promised. Because you have some debt to contend with now, those low scores are a result of the latter situation.

Squelch your shame, though. You’re one of millions of Americans who have made mistakes with credit cards. It’s easy to get into overwhelming debt, and, once you do, it’s hard to get out of it. And, as you’ve already learned, when you owe too much and don’t make the payments as you should, your credit rating suffers.

Here’s how to dig yourself out of this mess and get your finances and credit scores moving in the right direction:

1. Concentrate on getting a job. Ignore your score right now. The most important thing you need to do is to start bringing home a paycheck. I know that securing a job can be tough right now, but keep looking and eventually it will happen. You must earn an income, not just to pay your way in life, but to send money to your creditors. As your balances decrease, your credit rating will rise.

2. Obtain a secured credit card. Right now, you don’t deserve an unsecured account. I don’t write that to be cruel, but because unsecured credit cards are granted based on your current income and previous credit prowess. You have neither. Without them, the credit card issuer takes a mighty big risk in extending you credit, since it has no way of knowing that you can and will pay them back. However, a secured credit card is far less risky. The lender collects a cash deposit from you and holds it as collateral while also offering you a credit line. For this reason, secured cards are fairly easy to get.

3. Don’t make the same mistake twice. As I said, almost every cardholder falters some point. The key is to not let it happen again. You know how bad it feels to acquire huge balances and to be out of a job. So go ahead and use the secured credit card, but only for small, affordable items and services. Never carry over a balance, and always pay on time. As you are acutely aware, credit cards are not to be used for those times when you’ve run out of funds. Pretend the plastic doesn’t exist. If you come up short, suffer through it by eating rice and beans until your next paycheck arrives.

These three steps will lead you to a better place. Once you’ve cleared up the old debt and have established a positive payment pattern with the new card, your FICO score will smell a lot prettier than it does at this moment. When it is positively perfumey — around 700 or so — you can go for another credit card that offers a sweet rewards program.

Erica Sandberg is editor at large for Bankrate’s Credit Card Guide, columnist and features reporter for CreditCards.com, and the consumer protection spokeswoman for Western Union. She is also a contributing personal finance writer for the San Francisco Chronicle’s online edition, and author of Expecting Money: The Essential Financial Plan for New and Growing Families. Prior to her current work as a national money and credit expert and journalist, Erica was affiliated with Consumer Credit Counseling Service of San Francisco for 10 years.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

By Gary Silverman

The word “millionaire” invokes images of smartly dressed people sipping champagne, eating caviar, and listening to a live string quartet while docked off of Monaco on their yacht.

Most people think that it is beyond their wildest dreams to become a millionaire; that it is something reserved for those born with silver spoons in their mouths or lucky lottery winners. Yet obtaining $1 million is actually a fairly easy thing for a lot of people to do.

Starting at age 25, most people could take $10 out of their purse or wallet every day and set it aside. If they then invested that money in a mutual fund or some other type of investment that earned an average of 8%, they’d have a million dollars before they turned 65.

The problem isn’t so much saving the money; the difficulty lies in getting the person to leave it there for 40 years without spending it. But even if you could get them to the point of having $1 million, it may not be as glamorous as you’d think. The reality of having a million dollars is very different from our serenaded yachting couple.

Let’s say that you had $1 million in the bank. You put the money into a 5-year CD earning 2.5%. With all the zeros in that number, the math is pretty easy. Your million would be bringing in a cool $25,000 each year. That’s right, just a bit more than $2000 per month.

Don’t get me wrong, $2000 is a nice bit of money. It will buy nice outfits, some champagne, and many jars of caviar. However, the yacht off the coast of Monaco will still be a bit out of reach. While $25,000 a year is a nice amount of money on top of a pension, it’s really not a lot by itself.

“Oh, but Gary, I’d invest it into something that grows much better than a CD.” Perhaps. The thumb rule for an investment mix of stocks and bonds is that you could have a sustainable inflation-adjusted draw rate of around 4%. Four percent of $1 million is $40,000. So, with your diversified growth and income oriented brokerage account, you could probably spend about $40,000 a year safely. But, you’d definitely want to make sure you sign up for your Social Security payments.

Being a millionaire is certainly an accomplishment, but it’s not in the ballpark of being truly wealthy. Rather, that million will provide a comfortable frugal standard of living, or be a nice supplement to the one you already have. It just doesn’t go as far as it used to.

This surprises a lot of folks. They go from wondering how they could ever spend a million dollars to wondering how they could support themselves on only a million. 

So whether you have million dollar dreams, or just one of a healthy retirement, glimpse into the reality of your portfolio now, so you are not shocked later.

Gary Silverman holds the Certified Financial Planner (CFP®) license and is a member of the Financial Planning Association (FPA®). Gary is the founder of Personal Money Planning, a retirement planning and investment advisory firm, and is a Qualified Kingdom Advisor.

Find out more about Personal Money Planning at the company website or follow on Facebook.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

By Mary Hunt

For the past 20 years I have devoted my life to learning about money and personal finance. At first it was a matter of survival. It took 12 years for me to plunge my family into a pit of financial despair. Trapped. It appeared there was no way out. But appearances are not always what they seem. Slowly but surely, we began to fight, scratch, and climb our way out.

By 1992, we’d been working on our horrendous mountain of debt for nearly 10 years. About $12,000 of the debt remained. I desperately wanted to find an additional source of income so we could pay those last remaining credit accounts. It was time to close the chapter on that part of our lives.

About that time, I had a wild idea. What if I created a forum? One where I could help others help themselves, and help myself in the process? It seemed plausible, and a way I might be able to speed up the pay-back process.

My number one reason for starting a subscription newsletter was not a secret: I was in it for the money. I came clean in the first issue of Cheapskate Monthly (it has since undergone a name change to Debt-Proof Living and is available in electronic format to members at www.DebtProofLiving.com). I told anyone who would listen that I would provide information and motivation to get out of debt, just as my family was doing. We would take the journey together.

I am smarter now than I was in 1992. Naively, I thought I knew it all. I’ve proven that teaching teaches the teacher. I never dreamed I could become so passionate about a subject I had heretofore considered hopelessly boring. And I continue to learn.

I did raise the funds we needed to reach our goal. We used the profits from publishing the newsletter to finish repaying our whopping unsecured debt, and in a relatively short period of time, too. By my original design, it was time to move on. But I’d developed such a bond with my readers that my new passion transcended my original plan. I was hooked. Pulling the plug on the newsletter was not an option.

I also noticed something weird was happening. My new knowledge was intoxicating. I watched with astonishment as my family’s personal financial picture began to improve—significantly. As I taught my readers to anticipate the unexpected, we became better prepared. As I waded into the waters of beginning investing, our portfolio experienced amazing growth.

Often, I would step back and look at myself through eyes of astonishment. “Look at you! What an unlikely development for someone who was so financially ignorant, so downtrodden by debt, and so unwilling to change.” I liked what I saw. My husband liked it, too.

There is no doubt in my mind that getting out of debt is the important first step in gaining control of personal finances. But then what?

The only way to stay out of debt and keep moving toward a secure financial future is to effectively manage your income. That means to adopt a new way of living. It may require giving up old ways of thinking, changing attitudes about money, and rejecting the notion that you are entitled to more than you can afford on your income.

It’s only fair that I warn you: I am seriously opinionated on this matter of money, credit, and consumer debt. I refuse to pull punches or take the soft approach. I lived far too many years in financial bondage to see that condition as tolerable. I paid back more than $100,000 in unsecured debt. I’ve been there. I know what it takes. I know the temptations and challenges that hit us every day.

One of the most gratifying aspects of what I do is to have readers tell me I’ve changed the direction of their lives. If that has been so for even one person, I am blessed because I know my passion has found purpose. In that, I have found unspeakable fulfillment.

Mary Hunt, founder and publisher of the popular consumer website Debt-Proof Living, is a bestselling author, syndicated newspaper columnist, and speaker on consumer finance topics. Her 20th book, 7 Money Rules for Life, was released in January 2012.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

By Jason Alderman

If you’re worried you won’t be able to pay your income taxes by this year’s April 17 filing date, don’t panic; but don’t ignore the deadline and certainly don’t wait for the IRS to reach out to you first. Acting quickly not only gives you more repayment options, it can also significantly lower any penalties you might owe the government.

I’ll get to the repayment options in a moment, but first, a bit of good news. The IRS announced that it will provide two new forms of tax relief for certain 2011 taxpayers:

• The IRS is offering a six-month grace period for failure-to-pay penalties for certain wage earners who have experienced long periods of unemployment; or, if self-employed, experienced a 25% or greater reduction in business income in 2011 due to the economy.
• The IRS has also doubled the threshold for filing a streamlined installment repayment agreement (where you don’t have to supply a detailed financial statement) from $25,000 in taxes owed to $50,000.

Before going into greater detail on these new policies, let me cover how the process normally works and why it pays to at least file your return or ask for an extension, even if you can’t pay the bill:

If your 2011 federal tax return or extension request isn’t postmarked or electronically filed by midnight on April 17, 2012, the penalty on any taxes you owe increases dramatically. You’ll usually have to pay an additional 5% of taxes owed for each full or partial month you’re late, plus interest (the federal short-term rate plus 3% – currently 3.19%), up to a maximum penalty of 25% of the amount owed. But file your return or extension request on time and the penalty drops tenfold to 0.5% per month, plus interest.

Here’s how it can add up: Say you owe $2,000 in federal income tax. If you haven’t requested an extension, you would be charged an additional $100 (5%) for each month you’re late. Had you filed for an extension, the penalty would drop to only $10 a month (0.5%).

The new penalty-relief policy for certain taxpayers works like this:

• You must have been unemployed for 30 consecutive days or longer in 2011 (or in 2012 up through April 17).
• Your adjusted gross income cannot exceed $200,000 if married and filing jointly ($100,000 if single or head of household).
• You cannot owe more than $50,000 in 2011 taxes.
• To get the six-month penalty-free payment extension, you must pay all taxes, interest and other penalties by October 15, 2012.
• The failure-to-pay penalty amounts being waived are the same as described above (5% per month if you miss the filing deadline or 0.5% if you file by April 17 – both up to a maximum 25% penalty). However, the IRS is still legally required to charge interest on unpaid back taxes, as outline above.
• If you meet the penalty-waiver eligibility criteria, you must complete and submit IRS Form 1127-A by April 17. (Note: Don’t submit with your tax return; separate mailing instructions are found on the form.)

Be sure to contact the IRS early if you won’t be able to pay on time. They may even waive the penalty, depending on your circumstances – for example, if your underpayment was due to a casualty, natural disaster, death or serious illness of an immediate family member or other unusual event. Call 800-829-1040 or read Filing Late and/or Paying Late for more information.

IRS tax repayment alternatives that may be appropriate and available to you include:

Pay by credit card. You will likely be charged a small fee that is tax-deductible if you itemize expenses. Just be sure you can pay off your credit card balance within a few months, or the interest accrued might exceed the penalty. To learn more, visit this site.

Short-term extension. If you think you’ll be able to pay the full amount owed within 120 days, speak to an IRS representative (800-829-1040) or apply online HERE to see if you qualify for a short-term extension. If granted, you’ll still owe interest on your debt, but will avoid the application fee for an installment agreement.

Installment agreement. If you need longer than 120 days, an installment agreement will let you pay off your bill in monthly installments for up to five years, depending on your particular case. Penalties are reduced to 0.25% a month, although interest continues to accrue on outstanding balances. If your combined bill for tax, penalties and interest is $10,000 or less, you qualify for a guaranteed installment agreement provided you have filed and paid all taxes for the previous five years and haven’t had an installment agreement within that time.

What’s new is that the IRS has doubled the threshold to qualify for a streamlined installment agreement, which means you don’t have to supply a detailed financial statement with your application. If you owe $50,000 or less and are in good standing, you’re likely to qualify – that’s double the previous $25,000 threshold. Also, the maximum term for streamlined installment agreements has been raised from 60 to 72 months.

If you owe more than $50,000, you still may qualify, but may be required to file a detailed Collection Information Statement.

There is a $105 fee to enter an installment agreement. The fee is reduced to $52 if you set up a direct debit installment plan (or $43 for low-income filers – check IRS Form 13844 to see if you qualify). To apply for an installment agreement, fill out an Online Payment Agreement Application or submit IRS Form 9465.

Offer in Compromise. Under certain dire financial-hardship circumstances, the IRS may allow taxpayers with annual incomes of up to $100,000 (raised from the previous cut-off of $50,000) to negotiate a reduction in the amount they owe through an Offer in Compromise.

To qualify, you must be current with all filing and payment requirements and not in an open bankruptcy proceeding. There is a $150 non-refundable application fee, which may be waived for low-income applicants. You’ll also be required to submit an initial payment with your application.

Please note: Only a small number of offers in compromise are accepted and you should only pursue one after having exhausted all other payment options. For step-by-step instructions, read the IRS Form 656 Booklet. If you opt to hire a tax professional to help, read this IRS Tip Sheet.

If you find yourself unable to make payments on your installment agreement or offer in compromise, call the IRS immediately for alternative payment options, which could include reducing the monthly payment to reflect your current financial condition. You’ll likely be asked to provide proof of such changes so have that information available when you call.

IRS tax lien rules relaxed. One of the biggest downsides to owing the government money is that it can place a tax lien on your assets and future earnings. This is doubly painful because having a tax lien on your credit report can seriously damage your credit score and make it more difficult to buy or sell a car or home, among other disadvantages.

Last year the IRS significantly reduced the number of liens it issues by doubling the amount at which tax liability would trigger a lien to $10,000. The agency also made it easier for many people to remove liens from their credit report. For example:

• Once you’ve paid off your debt, you can request the IRS to update its public records to reflect that the lien has been withdrawn, which will remove it from your credit report. Before, the lien would remain on your report as “released” for seven years.
• You now can usually have your tax lien withdrawn by entering into a direct debit installment agreement for debt under $25,000. Just be sure you don’t default or a new lien could be imposed.
• To request a lien withdrawal in either of these cases, submit IRS Form 12277.

The IRS has a handy guide called The What Ifs for Struggling Taxpayers that reviews the tax impacts of different scenarios such as job loss, debt forgiveness or tapping a retirement fund.

Also, see my previous blog, Tax Strategies in a Tough Economy.

Nothing beats staying current on your taxes, but if you fear you may fall behind, explore these options before the penalties start snowballing.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It’s always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

 To participate in a free, online Financial Literacy and Education Summit on April 23, 2012, go to Practical Money Skills.

Jason Alderman is Senior Director, Global Financial Education, with Visa, Inc.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.