# Come up with a financial plan

#### Network News

X Profile
View More Activity
Washington Post Staff Writer
Saturday, January 8, 2011; 11:02 PM

My grandmother, Big Mama, was a stickler for order.

From Big Mama I learned to look at a financial situation and come up with a plan. I try to pass on that wisdom to readers, particularly those who join me regularly for my live chats on washingtonpost.com. The following are questions from some of those readers looking for a plan:

Q: My husband and I are renting a condo but really want to purchase a house. We have about \$11,000 in a consolidation loan (did a consolidation to stop using credit cards and it's been great. The interest rate is lower than the credit cards'). We currently have \$12,000 in savings. Would it make more sense to keep paying the loan (the minimum is \$350 a month, but I usually pay \$700 to \$1,000) and save what we can, or take the money from savings and pay off the loan and then build that backup (this would eliminate all debt)?

A: This is what I would do:

l Calculate how much you need for an emergency fund of at least three months of living expenses (rent/mortgage, food, utilities, cable, cellphone, etc.). This will give you a benchmark of how much you need in this fund before you even think of buying a house.

l Designate about \$1,000 to \$2,000 for a "life happens fund" for expenses that come up such as car repairs, etc. You can immediately create it by taking the money out of the \$12,000 you've saved and putting it into a separate account.

That leaves you with \$10,000 of the money you've saved already. From that do the following:

l Set aside \$5,000 as the beginning for your emergency fund.

Considering the current job market, best to have some cash saved up. But you can stop saving for this account when you reach the goal of at least three months of living expenses.

l Take the remaining \$5,000 and pay down the \$11,000 on the consolidation loan. That will leave you owing \$6,000. If you are paying upward of \$1,000 a month on that loan, you could be done with it in six months.

Once you've set up the life happens fund, met your goal for the emergency fund and paid off the loan, you're ready to start saving for the house.

Q: I have two credit cards, one with a balance of \$1,700 and the other with a balance of \$2,400. I have a personal loan of \$2,800, a car payment of \$312 a month with a \$14,000 balance, and a student loan of \$15,000, which is now in deferment. I want to start the process of paying these bills off to buy a house in a year.

 CONTINUED     1    2    Next >

© 2011 The Washington Post Company

X My Profile