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Your Money Weekend | Money Talk

Path Leading to Financial Peace of Mind Can Begin With 5 Steps


There's little question our financial lives are getting more complicated--so much so that many people hate to even think about their money and bills, for fear of being overwhelmed.

Others go to opposite extremes, setting up so many systems and accounts to handle their finances that they might be just as out of touch with their real money situation as the first group.

It doesn't have to be that way. With a little footwork, most people can streamline their finances, make sure their bills get paid and still have time for a life.

Here are five steps to get you started on simplifying your financial life:

* Trim your credit card count. The average American carries 4.9 credit cards, according to the Federal Reserve survey of consumer finances; American Consumer Credit Counseling says its clients tend to have 10 or more. That's five to 10 separate sets of due dates, minimum payments, interest rates and annual fees to keep track of--and that's way too much for most of us. Most people can live with just one card, or two if they carry a balance. The first card would have no annual fee (or rebate rewards) and would be used for new charges that are paid off in full each month. The second card, which would have a low interest rate, holds any unpaid balances and would not be used for any new purchases.

If your balances are too big to consolidate onto one card, that's a pretty good sign that you need to step up your efforts to pay off your debt. Other warning flags: difficulty making minimum payments, anxiety or fights with your partner over money, or spending an increasing percentage of your income on debt. You might be surprised how much stress, worry and bill-juggling you can avoid when you're debt-free.

* Plan for the big bills. Speaking of stress, some people constantly find themselves scrambling to pay their auto insurance, car registration, homeowners insurance, property taxes and other big non-monthly bills.

To avoid this chaos, add up these less regular expenses, dividing them by the number of paychecks you receive and setting up an automatic transfer of that amount to a savings or money-market account. Include a budget for holiday spending and for home and auto repairs. If you're not sure how much to put aside, look at last year's bills for a guideline. Homeowners can also use a rule of thumb that home repairs typically cost about 1% of the home's value each year.

* Direct-deposit your paycheck. Unbelievably, about 30% of workers who could take advantage of this timesaver still refuse to do so, according to the Direct Deposit and Direct Payment Coalition. There's no reason to stand in line at the bank to deposit your paycheck. It's safer, faster and more convenient to let your employer send it electronically to your bank account.

* Put your bills on automatic. Many people also resist this powerful simplifier--until they try it.

Mortgage companies, utilities and many other companies will gladly help you set up electronic debit plans that automatically take your monthly payments directly from your checking account. You don't need a computer or Internet access; direct payment works like direct deposit, only in reverse. The plans are usually free and eliminates the cost and hassle of mailing checks.

Direct payment works even for accounts that vary considerably each month, such as credit card bills. Many credit card companies will set up automatic plans that deduct the card's minimum payment from your account. Many also allow variable payments by phone or with a click of a mouse on their Web sites.

Some people resist automatic payments, saying they want to "control" when they pay their bills. Given that a due date is a due date, "control" doesn't amount to much, other than the possibility of delayed payments, late fees and possible dings to your credit rating.

Others worry about companies taking unauthorized payments, but Federal Reserve banking rules prohibit vendors from debiting more than the agreed payment or from taking it before the date specified by the consumer. If a mistake is made, consumers have 60 days to stop or reverse a payment.

If you're really nervous about automatic payments, try it with one or two of your smaller, most regular bills, such as cable TV. You'll soon add others.

If you're concerned about overdrawing your checking account, set up an overdraft protection plan with your bank (something you should have anyway) and make sure you keep a large enough balance to cover upcoming bills.

* Consolidate your financial accounts. There's little reason to have 10 different IRAs, 50 mutual fund accounts, five checkbooks and a dozen life insurance policies, but people do.

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