Reaping Your Rewards

3 options for dealing with the February financial freak-out

February is often the month of reckoning for people losing their grip on credit card debt: Your January bill may be bloated with holiday spending, debt realities ignored during the holidays re-emerge, and the new year has brought a chance for a fresh financial start.

 3-options-dealing-with-february-financial-freakoutSo where do you turn first?

Kim McGrigg, spokeswoman for Money Management International, says now is the time to assemble a financial team. The members of that team will vary depending on the extent of your debt, but some may include a credit counselor, financial planner or financial therapist, she says. Here are some avenues for help:

Credit counseling
Nonprofit credit counseling agencies are a good place to start. Services are available all over the country and the agencies should offer a free initial assessment.

Look for one that is accredited by a national organization such as the Association of Independent Consumer Credit Counseling Agencies or National Foundation for Credit Counseling. Check them out with your state attorney general, local consumer protection agency and the Better Business Bureau to see whether consumers have filed complaints. Counselors will help you assess your needs and, if you have severe debt, may recommend you enroll in a debt management plan.

“A debt management plan enables you to consolidate your debt payments into one manageable monthly amount,” says Soraia Dearaujo, vice president of operations for InCharge Institute in Orlando, Fla. Debt counselors will work with your creditors to lower your interest rates, put together a plan to pay down your debts and help you create a monthly budget and money management plan, she says.

If a debt management program is recommended, payment to the counseling agency varies by state, but typically runs up to $50 to set up the plan and $30 to $40 per month to administer your repayment plan. Get a written agreement on all costs and fees. If you can’t afford the monthly fee, a reputable service will waive it. If they won’t, look elsewhere.

Financial planners
“A financial planner can be a great help, especially if you are in a stage where you are working on your investment planning and college planning and retirement planning,” McGrigg says.

The designation Certified Financial Planner (CFP) is one of the most respected certifications, but there are many others. The Securities and Exchange Commission advises consumers to find out a potential adviser’s credential and what organization issued the credential, and then contact the organization to verify whether the professional remains in good standing with the organization. The Financial Industry Regulatory Authority offers an explanation of credentials on its website.

Fees for financial planning differ on whether the pay structure is by commission, in which the planner gets a percentage of the products you purchase through them; fee-only, in which the planner gets only the fee they charge for their services; or fee-based, in which the planner gets a combination of fees for their services and a percentage of the products you buy through them. Make sure the pay structure is spelled out in writing before you sign on.

Financial therapists
This is an emerging field, and it’s an option after a consumer has tried credit counseling and financial planning and just can’t make a plan work, says Ted Klontz, vice president of the newly formed Financial Therapy Association (FTA) and co-author of “Mind Over Money.”

The key to managing debt is to understand how you got the debt in the first place.

— Saly Glassman   
Personal finance author  

Financial therapists look for underlying psychological reasons for a consumer’s flawed relationship with money.

“This is for people who know better but can’t do better,” Klontz says. “You cannot follow through on what you know to be the right thing to do.”

Finding the best-qualified therapist for your situation is tricky because there is no specific certification for this specialty. Under the definition developed by the FTA, financial therapists can be financial planners, financial counselors, therapists, psychologists, social workers and others who provide advice, counsel and therapy.

The best financial therapists are those licensed in both social work or psychology and financial planning or credit counseling, says FTA founding member Joseph Goetz, assistant professor of the Family Financial Planning Program at the University of Georgia.

Finding the best person may take some interviewing. Ask a potential financial therapist what kind of questions they would ask, how much experience they have in the field, how many people they have helped and how they have helped them, Klontz says. Also ask what they charge.

Initial assessments should be free, those in the field say. After that, therapy typically runs from $100 to $200 an hour.

First, look within
Before you seek any outside help, ask yourself some questions, says Saly Glassman, managing director of investments with Merrill Lynch and author of “It’s About More Than the Money.” “It’s so easy to push this off onto a credit analyst or counselor. The key to managing debt is to understand how you got the debt in the first place.”

The emotional force of the holidays may have helped derail your long-term financial plan, Glassman says. She recommends this exercise to get back on track: Rank your priorities, such as health, career, family, hobbies and philanthropy, then ask yourself if you have been true to those priorities. “If my No. 1 priority is financial security and my last priority is family, and I blew the financial security by buying something that would please my family, then I am not living the priorities.” Revisiting the list through the year will help keep you out of trouble, she says.

How to avoid the same money mistake
There are steps you can take now to avoid being in the same spot a year from now:

  • If you’re getting a tax refund this year, use it to open a savings account so you can start building an emergency fund and don’t have to rely on credit cards for holidays or unexpected expenses, says John Szalicki at Cambridge Credit Counseling outside of Springfield, Mass.
  • Open your mail. People piling up debt “are overwhelmed and afraid of what they’regoing to see,” Dearaujo says. Get a clear picture of what you owe.
  • Figure out what you really spent over the holidays — not just the gifts, but the travel, the clothing, the postage, the cards and the food, McGrigg says. Divide that number by 12 and that’s the amount you should put away each month to get you through the end of the year without credit trouble. “You’ll be very happy come December,” she says.

See related:Retirement in sight? Balance risk tolerance with need for growth, Your first budget in three easy steps, 7 simple ways to build an emergency fund, 15 questiosn to help you pick the right credit counselor

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