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The 5-Day Fix for Your Finances

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Right now, it's more important than ever to get your finances under control. Yet even though it may seem like an impossible task, getting yourself on the road to better financial health doesn't have to be as difficult as you might think.

In dealing with finances, there are five major areas you need to look at closely. First, how you handle debt and your credit is the top factor in whether you're moving forward or backward. Once you've gotten rid of bad debt, setting up emergency accounts can help keep you out of temporary binds when the inevitable unexpected expenses come up. Next, you may want to start investing with mutual funds, either bought directly from fund companies or through a retirement plan at work. As you improve as an investor, you'll probably want to start looking at individual stocks. And finally, building a diversified portfolio of stocks, bonds, and other investments will leave your finances in prime position.

Throughout the week, I'll be taking a look at all of these issues. First and foremost, though, you have to make sure that you control your debt, rather than letting your debt control you.

Credit cards and you
Today is a long-anticipated day for those with credit cards. After passing last year, the Credit Card Reform Act has now seen most of its provisions take effect. Among the changes are limitations on card issuers raising rates on existing balances, time limits on disclosing future changes in your credit agreement, and giving you at least 21 days to pay once your card company sends you your monthly bill.

If you think the new laws are going to solve all your debt problems, though, you'll be disappointed. Consider:

  • Card companies still want higher profits. Although the new laws limit card issuers, many took steps to make more money before the laws took effect. For instance, after the law was passed, but before it took effect, many issuers, including Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , and Wells Fargo (NYSE: WFC  ) , increased rates for some customers, in certain circumstances to nearly 30%.
  • You still need a roof over your head. Credit card debt isn't your only concern. Even though interest rates on mortgages are near record lows, many homeowners can't take advantage of those rates to refinance their mortgages because they're underwater on their home loans.
  • The indirect cost of credit. Even if you don't pay a cent in credit card interest, credit cards can still cost you more in the form of merchant fees that get passed through to you and other customers. Recently, both MasterCard (NYSE: MA  ) and Visa (NYSE: V  ) -- neither of which has any exposure whatsoever to delinquent cardholders -- announced strong earnings growth. Similarly, American Express (NYSE: AXP  ) and Discover Financial Services (NYSE: DFS  ) saw big turnarounds in their earnings over last year's crisis-torn results -- although they retain some exposure to credit problems among cardholders.

What you can do
The first thing to do is to assess whether you have the means to cut back on expenses to make it so you have more money coming in than going out. If that's simply not possible, then you may have to resort to extreme measures like bankruptcy or credit counseling services to get back on your feet.

If you honestly can cut back, though, the key is to get your worst debt paid down first. Most of the time, that's credit card debt, because the interest you pay on credit cards is usually the highest. Every penny you can pay over the minimum payment will get you back in the black that much sooner -- and you simply can't find a better return from investing your money than the 15% or more you'll save in interest charges.

Finally, if you own a home, be sure that you know where you stand on it. Working with your lender may be difficult, but it's the best way to make the most of a bad situation. In some cases, homeowners are walking away from mortgages when banks choose not to work with them. That's a solution that benefits no one, so it's worth some effort to see if anyone at your bank has the ability and desire to work with you for a better outcome for all.

Most importantly, don't give up! Many people have bounced back from huge debts to become financially successful. If you've gotten this far, you've already taken that vital first step toward fixing your finances.

Stay tuned for the rest of the week as Dan continues his five-day fix series. Up tomorrow: setting up an emergency account for life's unexpected expenses.

Fool contributor Dan Caplinger dug himself out of debt once and promised himself he'd never have to do it again. He doesn't own shares of the companies mentioned in this article. American Express and Discover Financial Services are Motley Fool Inside Value recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy works seven days a week for you.


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The 5-Day Fix for Your Finances

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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