Digital Debt Reduction

It's the American way: you're a little too free and easy with that magic piece of plastic, and next thing you know, you're carrying a monthly credit card balance at an interest rate that would make a loan shark blush. The financial experts agree: the first step toward getting your personal finances in order is to pay off consumer debt.

They make it sound so easy.

In fact, getting out of debt is never easy, but you can make it easier with Intuit's Quicken 2000 (650/944-6000, http://www.intuit.com ). If you're really serious about living debt-free, you'll have to make basic changes in your spending habits--but Quicken can help you plan a strategy that will keep you on track.

Before you fire up your Mac, though, a little preparation is in order. First, figure out exactly how much you owe on all your credit cards. Second, try to consolidate that amount into a single debt at the lowest interest rate you can find, whether it's a home-equity loan, a teaser rate on a different credit card, or a loan from your grandmother. Most important (and painful), commit to a cash economy. That means cutting up your credit cards. If you need a credit card, get a debit card. From now on, you won't be spending more than you're earning.

James Bradbury is a former MacUser editor who believes that no one should own more credit cards than bicycles.

1. Come Up With a Plan   Once you know how much money you owe and what rate of interest you're paying on that debt, you can come up with a plan for exactly how long you'll take to pay it off.

To help you determine this goal, Quicken 2000 has a Debt Plan button. Found under the Assets & Debt tab, it takes you to a Java applet. Unfortunately, the button works only with Netscape Navigator. If you use another browser, you can get the same results from Quicken's Loan Planning Calculator (Activities: Planning Calculators: Loan).

Enter the amount of your credit card debt in the Loan Amount field, and then enter the annual interest rate in the next field. Enter the number of months you expect to take to pay off the loan, and you will see your total monthly payment. If the monthly payment is more than you can spare each month, increase the number of months you'll take to pay off the debt.

When you're done, you should have two crucial pieces of data: how many months it will take you to pay off the debt A and how much money you must budget each month to achieve that result B. (You can readjust these numbers after you've set up the rest of your budget in the next three steps.)

2. Set Up Categories   If you haven't been using Quicken categories to track your expenditures, now is the time to start. Only by using categories can you construct a realistic budget. Otherwise, you'll just be guessing where your money goes each month.

If you've already used Quicken, look over your existing categories to confirm that they make sense. Keep category names simple (Food or Car, for example), and create a suitable category for every major recurring expense.

If you're new to Quicken, accept the default Home categories that Quicken sets up when you create a new data file (command-N) or start Quicken for the first time. Then add or delete categories via the Categories & Transfers window (command-L).

For nonessential expenditures such as movies, lattes, designer shoes, and eBay purchases, create a catch-all category called Personal by clicking on the New button A in the Categories & Transfers window.

Also, add a new category for payments to your debt. In our example, it's called Acme Credit Card.

3. Categorize Your Transactions   Now go through your Quicken checking account and credit card registers and put each transaction into one of the categories you've set up. Do this for at least three months of transactions.

Assign categories either by clicking on the down arrow in the category box a or by typing the first few letters of a category name (Quicken will fill in the rest automatically).

If you come across an essential expenditure that simply doesn't fit into any of your existing categories, you can quickly add a new category by typing in the name, hitting return, and clicking on Set Up.

Remember to put nonessential expenditures in the Personal category b you created in step 2. Put anything you spend that doesn't fit one of the standard categories--including cash that you withdraw from the ATM--as Personal unless you spent the money in another category, for example, Food.

Don't neglect to categorize your regular income. The money you expect to earn every month is an essential element of your budget planning.

4. Create Your Budget   Now you should be ready to create a budget. Your goal is to fiddle with your expenses until they are less than or equal to your income.

The fastest way to create a budget in Quicken 2000 is to select the QuickBudget option in the Create Budget dialogue box (Activities: Budgeting: Budget Setup). This option will help you set up an initial budget based on all those transactions you categorized in your registers.

When you specify the date range that QuickBudget will use to create a budget A, the range should encompass only transactions that you carefully categorized in step 3.

Quicken 2000 separates categories into fixed (such as your taxes) and flexible (such as your clothing costs). The bottom of the Budget window tells it all: if Total Budget Expenses is greater than Total Budget Income, you've got to make some adjustments to your flexible expenses.

5. Track It   Simply creating a budget is not enough. Quicken 2000 really excels at keeping track of how well you're actually following the plan you've just made.

Once you've finalized your payment plan, go back to the Loan Planning Calculator and click on Payment Schedule. You can print out a copy of this schedule for added motivation.

The Budget Monitoring feature (Activities: Budgeting: Budget Monitoring) tracks spending and shows you how well you're conforming to your budget in each category. A yellow bar means you're close to going over budget. Red means you've crossed the line.

If you keep a close watch on expenses (and make that monthly payment on your debt), you'll be back in the black before you know it.

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